Why Did My Credit Score Drop?

Checking your credit score is an easy way to tell if you’re making smart financial moves with your credit cards and loans. It’s a representation of how well you’re paying your bills, keeping your overall debt under control, and a few other signs of personal responsibility. But even if you feel like you’re doing everything right, you might be making some mistakes that could cause a drop in your score since the last time you checked. Here’s a look at what they are and how to get back on the right track.

Problem: Missed Payments

Making payments on time accounts for nearly 40% of your credit score. Since it carries so much weight, a missed payment — or worse, a history of missed payments — will likely have a significant negative impact on your score. Even though it may not plummet the first time you pay late, your score will drop should it become a habit.

Solution: Get Ahead of the Problem

In the best of all possible worlds, you pay your credit card bills on time every time. But that isn’t always possible — particularly if you’ve undergone a layoff or furlough. If you know you will not be able to pay on time, call your creditor before the due date to see if they would be willing to work out an arrangement, like a pay deferment, forbearance, or a payment plan, due to your special circumstances.

Problem: Using Too Much Credit

Your credit utilization ratio — or how much credit you’re using versus the amount of credit you have available to you — is another key factor in determining your credit score. It’s best to use only 10% to 30% of your available credit on each card individually and on all of your cards combined. Using any more will cause your score to drop.

Solution: Make a Plan to Repay Debt

Create a payment schedule for yourself that will help you use less and less of your credit until you get into that 10% to 30% utilization range. We also suggest considering opening another credit card. This is only a good move if a) your credit is good enough to qualify and b) you can handle the additional credit without overspending. But the result of doing so is that the amount of credit available to you will go up, and if your spending stays the same, the ratio, in turn, will go down.

Problem: Too Many or Too Few Credit Lines

Closing credit cards will affect your credit score. Opening too many lines of credit will also adversely affect it. Yes, it’s a frustrating conundrum. What you’re looking for is the sweet spot — enough to keep your utilization ratio in the right place without having to continually open and close cards to maneuver it.

Solution: Manage Your Credit Carefully

Before you look to take out a loan or open a new card, assess your credit situation. Ask yourself, “Will I be looking to apply for more credit in the near future?” If so, hold off on applying for another card now. And if you have a card you don’t want anymore, as long as it doesn’t have an annual fee don’t close it. Just take it out of your wallet and don’t use it.

Problem: Lenders Lowering Credit Limits

Lenders can lower credit limits or even close out credit cards that haven’t been used in a long time. Because finances are so uncertain, they want to protect their businesses, too, and rid themselves of any risk their customers may pose. Their actions could lower your score.

Solution: Start Using Dormant Cards

If you’re trying to avoid having a card closed by the issuer, be sure to use it every once in a while, even if it’s not a card you typically use. (The cards that you want to protect most are those with the largest credit limits and the ones you’ve had the longest.) The easiest way to do this is to find one bill that stays the same each month, put it on the card, and then pay it off automatically.

With Rebecca Cohen