So, you’ve just checked your latest credit report, and… your credit score has dropped. Uh oh.
Take a deep breath. There’s no reason to panic just yet!
Seeing a sudden dip can definitely be a little stressful, especially if you haven’t done anything obvious to mess with your finances.
But sometimes, credit scores drop for reasons that aren’t immediately clear—like report errors or unexpected credit activities.
If you’re thinking, “Why did my credit score drop?”—we’ve got you.
In this article, we’ll break down the usual suspects behind those sneaky score drops and explain how they might be affecting your financial situation without you even realizing it.
1. Late or Missed Payments
Your payment history is a big deal when it comes to your credit score, making up 35% of your FICO score.
This means that even if you were just a little late on making a payment, this could easily make your credit score drop by five or more points–especially if they’re reported as 30 days late or more.
2. Applying for New Credit
Applying for new credit causes a hard inquiry to pop up on your credit report, temporarily dropping your score.
A single inquiry is usually okay, but having multiple inquiries in a short timeframe can be a red flag to lenders. It tells them that you are financially unstable, making you appear like a higher-risk borrower.
However, not all credit inquiries are created equal. There are two types: soft and hard.
A soft inquiry happens when a lender or creditor takes a peek at your credit report, usually for things like pre-approval offers or background checks. Soft inquiries won’t affect your credit score.
A hard inquiry, on the other hand, occurs when you apply for new credit, such as a credit card or loan. This may be why your credit score drops up to 100 points after opening a credit card. Moreover, hard inquiries might stay on your credit report for up to two years. But the good thing is their impact on your credit score fades over time.
So, if you plan to apply for credit soon, it’s best to be strategic about your applications and limit them as much as possible.
3. Derogatory Marks
If you’ve noticed your credit score drop, derogatory marks on your credit report might be another possible culprit.
These marks mean you didn’t repay a loan as planned, and they can come from things like late payments, bankruptcy, lawsuits, foreclosure, or even tax liens.
Unlike hard credit inquiries that vanish after two years, derogatory marks tend to stick around for a while—usually seven to ten years.
Unfortunately, they can make qualifying for better loan terms harder.
But don’t worry–the impact of a derogatory mark diminishes over time. You can even have specific derogatory remarks removed from your credit reports.
So, if you come across a derogatory remark on your report, start by verifying its accuracy. If you think it’s erroneous, you can contact the credit bureaus to initiate a dispute.
4. High Credit Utilization
It’s important to keep your credit utilization ratio in check. This ratio is the amount of credit you use compared to what you have available.
Ideally, you want to keep that number under 30%. If you go over, it could be why your credit score dips—sometimes by 20 points or more!
Maintaining a low credit utilization ratio shows you use your credit responsibly. So, let’s say your credit card limit is $1,000–your credit card balance should not exceed $300.
To lower your credit utilization, you can ask for a credit limit increase (without spending more, of course!) or simply cut back on how much you’re charging to your card. Alternatively, you can use a virtual Cushion card or BNPL to pay for regular payments or expenses.
By choosing Cushion, you’re not just managing your spending better; you’re also turning everyday payments into opportunities to strengthen your credit history. With Cushion’s virtual card, your payments are organized and reported, helping you maintain a healthy credit utilization ratio and potentially enhancing your credit score.
5. Changes in Credit Mix or Account Closures
Shutting down a credit card account can bump up your credit utilization ratio and might also shorten the length of your credit history — both of which could affect your credit score.
Remember, your credit history length counts for 15% of your FICO Score. The longer it is, the better.
However, if you’ve made all your payments on time and your account is closed in good standing, it could stay on your credit report for up to 10 years, contributing to a positive payment history.
Unless a credit card is burning a hole in your wallet with a hefty annual fee, or it’s just too tempting and leads you to overspend, it’s usually a good idea to keep it open. This way, you hold onto your credit limit and keep your credit history lengthy.
6. Credit Reporting Errors
Spotting mistakes on your credit report, like wrong account details or transactions, can lower your credit score.
That’s why it’s important to regularly check your credit report and dispute mistakes or inaccuracies with the credit bureaus.
Mistakes can happen more often than you think, and incorrect personal data or payment history may be why your credit score dropped 40 points.
7. Identity Theft
Identity theft is a major concern not only in the United States but in the whole world.
In 2024, the Federal Trade Commission received 5.7 million reports for identity theft and fraud, a significant increase from the previous year’s 4.7 million.
If someone uses your information to open unauthorized accounts or perform fraudulent transactions, it can damage your credit score.
Therefore, you should regularly monitor your credit report to detect and resolve such issues promptly.
If you notice your credit score going down even when you pay on time and find any inaccurate or suspicious information, immediately dispute it with the credit bureaus.
Summary
Figuring out why your credit score dropped is the first step to getting things back on track. By staying on top of your payments, managing how much credit you’re using, and reviewing your credit report regularly, you can take control and make sure your score stays healthy. It’s all about being proactive so your financial health stays solid.
