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It’s never a good feeling to see that your credit score has dropped since you last checked. But being able to quickly identify the cause can help you take the right steps to get it back on track.
Your credit score can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts. And don’t forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Let’s look at the nine main reasons why your credit score might have dropped, and how you can address each of them.
1. Late or missed payment
Payment history is a critical component of your credit score.
If you were only a few days late on a payment, it’s unlikely to show up on your credit report. But once payments are more than 30 days late, card issuers will report them as delinquent to the credit bureaus. If this happens to you, you can expect your credit score to take a hit. And if the payment is reported as being 60 or 90 days late, your credit score could fall even further.
Keeping track of payments can be difficult, especially if you have multiple credit cards and loans. If you’re worried about bills getting lost in the mail pile, enrolling in automatic payments could be a smart move.
2. Accounts in collections
Collections on your credit reports indicate that you didn’t pay a loan as agreed in some way. There are a few reasons why your bank or credit issuer may have passed your debt to a collections agency.
Debts sent to collection agencies will remain on your credit report for about six years.
3. Change in credit utilization
Your credit utilization rate (how much of your available credit you use) is another important factor in determining your credit score.
If you spent more than usual last month (because of a large purchase, family holiday or other reason), it will increase your credit utilization rate. The effect on your score will vary, depending on how much your ratio of credit used versus available credit went up. To keep your credit score steady, we recommend that members keep their credit utilization rate below 30%.
Imagine that you have a $10,000 credit limit, of which you typically only use $1,500 (15% credit utilization rate). If your spending one month increases to $2,500, your utilization ratio will still be solid overall at 25%. But if your spending suddenly increased to $5,000 (50% credit utilization rate), your score could start showing a decline.
4. Reduced credit limit
Why can a lower credit limit cause your credit score to drop? Because your credit utilization rate will go up even if your spending stays exactly the same.
Consider this example. You typically spend $1,500 of your $7,000 credit limit for about a 20% credit utilization rate. That’s good. But then imagine that your credit limit is reduced to $5,000. In that case, your credit utilization rate would instantly jump to 30%.
If your credit score takes a hit after a credit limit reduction, take a close look at your utilization rate. You may need to reduce your credit card spending to help improve your score.
5. You closed a credit card
There are multiple reasons why closing a credit card can cause your credit score to drop. First, when you eliminate a credit card, it reduces your available credit. So, if you don’t reduce your spending in kind, your credit utilization ratio will go up.
The second reason closing a credit card could hurt your credit score would be if it hurts the average length of your credit history. The older an account, the more it could affect your average account age when you close it. Before you close your oldest credit accounts, consider whether it’s absolutely necessary.
6. You paid off a loan
Wait — paying something off can cause your credit score to drop? While it may seem illogical, the answer is yes.
One reason that paying off a loan can have a negative effect on your credit score is that it could change your credit mix. In general, having a healthy mix of revolving credit (like credit cards) and installment loans (like mortgages and auto loans) is good for your credit score.
But this doesn’t mean that you should avoid paying off your loans only for the sake of your credit score. You can still build a strong score without having one of each type of credit.
7. You’ve recently opened, or applied for, multiple lines of credit
When you open several credit accounts in a short period of time, you represent more of a risk to lenders. For this reason, your credit score may drop if you’ve had several hard credit inquiries placed on your credit report recently.
It’s important to point out that checking or monitoring your credit with tools like Credit Karma doesn’t affect your score.
If you’re rate shopping, we recommend that you do so in a short period of time. For example, if you’re shopping for a mortgage or auto loan within a 30-day period, the credit bureaus will typically group the inquiries together. But if you’re considering applying for a credit card, keep in mind that you’ll get a ding on your credit report for each credit card you apply for, no matter how close those hard inquiries are over a matter of days. So be sure to only apply for credit cards that you truly need.
8. Mistake on your credit report
So far we’ve assumed that your credit score dropped because of accurate information on your credit reports. But what if that’s not the case?
Lenders can make mistakes too. That’s why it’s important to check your credit reports to keep an eye out for errors.
If you find a mistake on your credit report, you have the right to dispute it with the credit bureaus and with the reporting lender. Companies are required to investigate the dispute free of charge and promptly correct errors that are confirmed.
9. You were the victim of identity theft
Finally, let’s address what might be the most frightening reason for a drop in credit score: Someone could have stolen your identity and applied for (and opened) credit accounts in your name.
If you discover that an impostor is using your identity, don’t panic. There are actions you can take to help reverse the damage it may have caused to your credit score.
But how do you spot identity theft in the first place? One step to consider is credit monitoring. Keeping a close eye on your credit score and credit report may help you catch suspicious activity faster than if you’re not regularly monitoring your accounts.
If you’ve been a victim of identity theft, you’ll likely want to make a recovery plan. Placing a fraud alert on your credit file could be a good place to begin.
After you’ve added your fraud alert to your credit profile, you may want to go to the Canadian Anti-Fraud Centre website where you can report an identity theft complaint. Then you can begin the process of disputing inquiries on your report if necessary.
Next steps
Seeing your credit score drop may cause you some anxiety. But if you take the steps necessary to identify the factors that led to the decrease, you’ll often find that you can take action to get your score back up.
Whether it’s setting up a Direct Debit so you don’t miss a payment, or correcting a mistake on your credit report, these drops can be temporary if you put the right plan in motion.