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Why did my credit score decrease?

Published July 24, 2023

5 min read

Key Points About: Why did my credit score drop?

There are many reasons why your credit score could have dropped, including late payments and recent credit inquiries.
You should regularly monitor your credit report to keep track of any changes that might be affecting your credit score.
Responsible credit management can help you get back on track if your credit score recently dropped.

Have you recently checked your credit and noticed your credit score dropped? If so, you may be wondering what happened. According to the Federal Trade Commission, your credit score is an important number that lenders use to determine whether to approve you for credit. A drop in your credit score may have an impact on your ability to get credit in the future. Understanding what categories could be impacting your credit score is important in managing your financial future.

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Late Payments

One reason why your credit score might have dropped is late payments. Your payment history is one of the key categories that help determine your FICO^® Credit Score, a scoring model used by many lenders (in fact, 90% of top lenders use FICO^® Credit Scores).²

Your payment history makes up 35% of your credit score, so a missed payment or late payment can negatively affect a credit score. According to The Federal Reserve Board, late payments can stay on your credit report for up to seven years, so it's important that you pay your bills on time.

What to do if you had a late payment?

If you've missed a payment, the best thing you can do is make a payment as soon as possible. While the late payment may still show up on your credit report, if you pay your bill as soon as possible, you may be able to avoid any future damage to your credit score.

High Credit Utilization

Your credit utilization (the amount of your total credit limit that you're using as a percentage) is another category that impacts your credit score. If you use too much of your available credit, that may show lenders that you're overextended and that you may have difficulty paying back your debts.

What to do if you have high credit utilization?

If you're using a high percentage of available credit, you should try to pay down your balances as quickly as possible to lower your utilization ratio. According to the Office of Financial Readiness, you should ideally aim for a credit utilization ratio of 1-10%.

Credit Inquiries

When you apply for credit, lenders typically check your credit report and credit score. These checks are called credit inquiries.

According to the Consumer Financial Protection Bureau, a soft credit inquiry (also called a soft credit check) does not impact your credit. You'll sometimes get a soft inquiry when you pre-qualify for a credit card. Hard inquiries, on the other hand, happen when you apply for a new credit card or loan and can affect your credit.

Hard inquiries typically have a small impact on your credit score, but, if you've applied for several loans or credit cards in a short period of time, it may negatively affect your credit score.

What to do if you have credit inquiries?

You should try to limit the number of credit inquiries that you make. If you're shopping around for a loan or credit card, try to limit your search to the same short time period to lessen the impact on your credit score.

Errors on your credit report

Occasionally, credit reporting errors may cause a drop in your credit score. For example, if a lender reports a late payment that you actually made on time, it can negatively impact your credit score. According to USA.gov, errors on your credit report (for example, new accounts you don't recognize) could also be a sign of fraud; that's why you should regularly review your credit report.

What to do if you notice errors on your credit report?

If you notice errors on your credit report, contact the credit bureau that issued the report to dispute the credit error. The credit bureau will investigate the error, and if it's found to be incorrect, will update your credit file accordingly.

Credit limit decrease

When you first got your credit card, your card issuer may have set your credit limit based on things like your income, housing payment, credit history, and credit score. According to the Consumer Financial Protection Bureau, changes in your credit profile may affect your credit limit. For instance, your credit card company may lower your credit limit if you frequently miss or make late payments. (Note: According to the Consumer Financial Protection Bureau, typically your credit card company must give you notice before they lower your credit limit).

If you continue your regular spending habits while having a lower credit limit, you can run the risk of increasing your credit utilization rate, which can negatively affect your credit score.

For example, above, let's say your total credit limit was $1,000 and you carried a balance of $300. In this case, your credit utilization ratio would be 30%. If your credit card issuer lowered your limit to $500, but your balance stayed the same, your utilization ratio would change to 60%. So, a credit limit decrease could raise your credit utilization ratio and may hurt your credit score.

What can you do if your credit limit decreased?

You can try to request a credit limit increase from your card issuer or open a new credit card account to boost your spending power if you think your credit limit is too low. But if your limit decreased because of poor credit habits (like consistent late payments), a credit increase may be challenging to come by. Instead, you should take steps to improve your credit.

Closed credit account

Even if you have a card you don't use much, you should always think twice before closing a credit card account. When you close a credit account, you may run the risk of increasing your credit utilization ratio.

What to do about a closed credit account

If you closed a credit account recently (or if your credit card company closed your account), then you should check your credit report and your credit score to see if your score was affected. If you believe that the closed account was an error, you may be able to dispute it.

How do I stay on top of my credit score after a score drop?

Staying on top of your credit score requires a careful look at your current spending habits. Read on to learn more about the steps you can take to better understand your credit score.

Pay your bills on time

On-time payments are essential to get a good credit score. You should pay at least your minimum monthly payment each month.

Keep your credit utilization low

Keeping track of how much you’re spending can help you manage your credit utilization. If your credit card company has a mobile app, you may be able to set alerts that tell you when you’ve reached a certain balance.

Monitor your credit regularly

You should regularly check your credit report. According to the Federal Trade Commission, under the Fair Credit Reporting Act, consumers are entitled to one free credit report from each of the three major credit reporting agencies every 12 months. You can request your free credit report at AnnualCreditReport.com.