Why Did My Credit Score Drop 20 Points?
Your credit score may drop due to increased utilization, payoff or missed payment. There can be other factors such as account age.
2024-09-03 12:41:01 - CreditBono
A drop in your credit score can be disheartening, especially if you’re unsure of the reason behind it. Even a small decrease, like 20 points, can affect your financial health, impacting loan rates, credit card approvals, and even rental agreements. Understanding the factors that can lead to such a decline is crucial in managing and improving your credit health. In this article, we'll explore common reasons why your credit score might drop by 20 points and provide guidance on how to address these issues.
1. Increased Credit UtilizationOne of the most common reasons for a drop in credit score is an increase in credit utilization. Credit utilization refers to the percentage of your available credit that you are currently using. For instance, if you have a credit card with a $5,000 limit and you carry a $1,000 balance, your credit utilization is 20%. Ideally, you should aim to keep this ratio below 30%.
If you’ve recently increased your credit card balance or taken on new credit card debt, your credit utilization ratio might have risen, leading to a decrease in your credit score. Even small changes in your spending can impact this ratio, especially if your credit limits are relatively low.
How to Fix It:
- Pay Down Balances: Try to pay off any existing credit card balances as quickly as possible.
- Request Higher Credit Limits: If your financial situation allows, consider asking your credit card issuer for a higher credit limit. This can reduce your credit utilization ratio.
- Monitor Your Usage: Regularly review your credit card statements and keep track of your spending to avoid unexpected increases in utilization.
Payment history is the most significant factor in your credit score. A single late payment can have a substantial impact on your credit score, especially if it’s recent. Payment history accounts for approximately 35% of your credit score, so any missed or late payments can cause a notable decline.
If you’ve missed a payment on any of your accounts—be it credit cards, loans, or mortgages—it’s likely that your credit score has been affected. The severity of the impact depends on how late the payment was and how recent it is.
How to Fix It:
- Bring Accounts Current: If you have any past-due accounts, prioritize paying them off as soon as possible.
- Set Up Reminders: Use automatic payments or set calendar reminders to avoid missing future payments.
- Contact Creditors: If you have a good payment history and your missed payment was an isolated incident, you can sometimes negotiate with your creditors to have the late payment removed from your report.
When you apply for new credit—whether it's a credit card, auto loan, or mortgage—creditors perform a hard inquiry into your credit report. Each hard inquiry can cause a slight, temporary dip in your credit score. While a single inquiry might only drop your score by a few points, multiple inquiries within a short period can lead to a more significant drop.
How to Fix It:
- Limit Credit Applications: Only apply for new credit when necessary. Each application can affect your score, so be selective.
- Monitor Your Credit Report: Regularly check your credit report for any unauthorized or erroneous inquiries that could be impacting your score.
Closing a credit account can also impact your credit score. When you close a credit card, you reduce your total available credit, which can increase your credit utilization ratio. Additionally, closing an old account can reduce the average age of your credit history, which may negatively affect your score.
How to Fix It:
- Keep Accounts Open: If possible, keep older accounts open, even if you don’t use them frequently. They contribute positively to your credit history.
- Use Cards Wisely: If you have multiple cards, use them occasionally to keep the accounts active.
Sometimes, inaccuracies or updates in your credit report can lead to a score drop. This might include incorrect account balances, erroneous late payments, or the appearance of a new account you didn’t open. Regularly reviewing your credit report is crucial to catching and correcting any errors.
How to Fix It:
- Check Your Credit Report: Obtain a free credit report from each of the major credit bureaus—Equifax, Experian, and TransUnion—at least once a year.
- Dispute Errors: If you find inaccuracies, file a dispute with the credit bureau to have them corrected.
While debt-to-income (DTI) ratio isn’t a direct component of your credit score, changes in your income or debt levels can influence your credit score indirectly. A significant increase in debt or a reduction in income can lead to higher credit utilization and more missed payments, thus impacting your score.
How to Fix It:
- Manage Debt: Work on reducing your overall debt load and improving your income to maintain a healthy DTI ratio.
- Budget Wisely: Create and stick to a budget to ensure you manage your expenses and debt effectively.
If you’ve recently started using credit more frequently—such as charging more to your credit cards—this could impact your credit score. Frequent use of credit can lead to higher balances and increased credit utilization, both of which can negatively affect your score.
How to Fix It:
- Monitor Spending: Keep track of your credit card usage and avoid charging more than you can afford to pay off each month.
- Pay Off Balances: Regularly pay off your credit card balances to avoid accumulating high debt.
If you had a credit account that was closed or canceled by a lender—perhaps due to inactivity or missed payments—it could impact your credit score. This is especially true if the account was your oldest credit line or had a significant credit limit.
How to Fix It:
- Maintain Active Credit Lines: Ensure that you keep some credit accounts active to build a positive credit history.
- Diversify Credit Types: Having a mix of credit types, such as revolving credit (credit cards) and installment loans (car loans, mortgages), can positively influence your credit score.
Identity theft or fraudulent activity can cause significant and unexpected drops in your credit score. If someone has opened accounts in your name or made unauthorized charges, this can negatively affect your credit.
How to Fix It:
- Monitor Your Credit: Regularly check your credit report for any signs of fraud or unauthorized activity.
- Report Fraud: If you suspect identity theft, report it to the credit bureaus and consider placing a fraud alert or credit freeze on your report.
Lastly, changes in the credit scoring models or the way credit bureaus report information can also cause fluctuations in your score. While this is less common, updates to credit scoring models or reporting standards can sometimes impact scores.
How to Fix It:
- Stay Informed: Keep up-to-date with changes in credit reporting and scoring models to understand how they might affect your credit score.
- Adapt Strategies: Adjust your credit management strategies based on the latest information and best practices.
A drop in your credit score by 20 points, while not catastrophic, should be addressed promptly to prevent further declines. By understanding and addressing the potential causes—such as increased credit utilization, late payments, new credit inquiries, or account changes—you can take steps to stabilize and improve your credit score. Regular monitoring of your credit report, prudent financial management, and proactive measures to correct any issues are key to maintaining a healthy credit score. Remember, credit scores fluctuate over time, but with diligent management, you can work towards achieving and sustaining a strong credit standing.