Why Did My Credit Score Drop? 5 Possible Reasons
Credit scores are complex and can fluctuate for many reasons, some of which may seem unfair or confusing. In this blog, we will explore some of the most common reasons a credit score might drop unexpectedly, whether paying collections can increase a credit score, why paying off debt might sometimes cause a credit score to go down, and how Upwardli can help you can improve your credit score
Factors in a Credit Score
Credit scores are calculated based on a variety of factors, including payment history, credit utilization, length of credit history, types of credit, and new credit inquiries. A change in any of these factors can impact your credit score positively or negatively.
Payment history
One possible reason why your credit score may have dropped is due to a late payment or missed payment on a credit card or loan. Payment history is the most significant factor that affects your credit score, so even one missed payment can have a big impact.
Late payments stay on your credit report for up to seven years, and the longer ago the late payment occurred, the less impact it will have on your credit score. If you have recently missed a payment, it's important to get caught up as soon as possible to minimize the damage to your credit score.
If your late payment was a one-time thing and you've otherwise been a good customer, it can be worth calling the credit card company and asking them not to report the late payment to the credit bureaus.
2. Utilization
Another reason why your credit score might have dropped is due to a high credit utilization ratio. Your credit utilization ratio is the amount of credit you're using compared to your total available credit. A high credit utilization ratio indicates that you're using a large portion of your available credit, which can be a red flag to lenders.
Generally, you should aim to keep your credit utilization ratio below 30% but the lower, the better. If you've recently made a large purchase or used a significant amount of credit, this could be a reason why your credit score has dropped.
3. Credit report errors
It's also possible that there was an error on your credit report that caused your credit score to drop. Errors on credit reports are more common than you might think, and they can include things like incorrect account balances or fraudulent accounts.
It's important to regularly check your credit report and dispute any errors that you find to ensure that your credit score accurately reflects your creditworthiness.
4. Paying collections
Now let's move on to the question of whether paying collections can increase credit score. Collections accounts occur when a debt is sent to a third-party collections agency because the original lender was unable to collect the debt from you.
Collections accounts are negative marks on your credit report and can significantly impact your credit score. Paying off a collections account won't remove it from your credit report, but it can help improve your credit score over time. That's because lenders want to see that you've paid off your debts, even if they were sent to collections.
5. Paying down debt
Finally, let's explore why paying off debt might sometimes cause a credit score to go down. This phenomenon is known as the "debt paradox," and it can happen when you pay off a large amount of debt all at once.
When you pay off a large amount of debt, your credit utilization ratio decreases, which should be a good thing for your credit score. However, if you close the accounts that you paid off, your credit utilization ratio could actually increase, which could negatively impact your credit score. Additionally, if you paid off a large amount of debt all at once, it could temporarily decrease the average age of your credit accounts, which could also lower your credit score.
Grow your score with Upwardli
Upwardli was created to help immigrants to the US of any status build their credit. Get pre-approved instantly with no credit check or deposit required. Each account includes an unsecured line of credit designed to build your credit fast. And we report your progress to credit bureaus.
Get your risk-free 30-day trial now and watch your credit grow! We have also created dozens of resources to help you learn about the US financial system, including how to rent an apartment, buy a car, understand your credit report, and much more!