Seeing a drop in your credit score can be concerning, especially if you aren’t sure why it happened. Credit scores fluctuate based on a variety of factors, and understanding the key reasons for a decline can help you take corrective action. Here are five common factors that may cause your credit score to drop and how you can address them.

1. Missed or Late Payments

Why It Matters: Your payment history accounts for 35% of your credit score, making it the most significant factor. Even a single missed payment can lower your score, particularly if it is reported as 30 days late or more.

What to Do:

• Set up automatic payments or reminders to ensure bills are paid on time.
• If you missed a payment, pay it as soon as possible. The longer it remains unpaid, the greater the impact on your score.
• Contact your creditor to discuss possible late fee forgiveness or repayment plans.

Tip: Paying on time consistently can gradually rebuild your payment history and improve your score.

2. Increased Credit Utilization

Why It Matters: Your credit utilization ratio—how much of your available credit you’re using—makes up 30% of your credit score. A spike in your credit card balance can increase your utilization, leading to a score drop.

Example: If you have a $10,000 credit limit and your balance increases from $2,000 to $6,000, your utilization jumps from 20% to 60%, which negatively impacts your score.

What to Do:

• Pay down balances as soon as possible to reduce your utilization ratio.
• Aim to keep your credit utilization below 30% of your total limit.
• Request a credit limit increase (if your financial habits are responsible) to lower your utilization percentage.

Tip: Credit card companies typically report balances at the end of the billing cycle, so paying your card balance early can help lower your reported utilization.

3. Hard Inquiries from New Credit Applications

Why It Matters: When you apply for new credit, lenders perform a hard inquiry on your credit report to assess your eligibility. Each hard inquiry can cause a slight drop in your credit score, typically by a few points. Multiple hard inquiries within a short period may signal financial stress to lenders.

What to Do:

• Limit credit applications to only when necessary.
• Shop around for loans (e.g., auto or mortgage loans) within a short period, as credit scoring models typically group inquiries made within 14-45 days as one inquiry.
• Monitor your credit report for unauthorized hard inquiries, which could indicate identity theft.

Tip: Hard inquiries have a temporary effect on your score and typically fall off after 12 months.

4. Closing Old Credit Accounts

Why It Matters: Closing an old credit account can reduce your overall available credit, increasing your credit utilization ratio. It can also shorten the average age of your credit accounts, which affects 15% of your credit score.

Example: If you close a card with a $5,000 limit and keep other cards open, your overall credit limit drops, raising your utilization percentage.

What to Do:

• Keep older accounts open, even if you don’t use them regularly.
• If an account has an annual fee, consider downgrading it to a no-fee version instead of closing it.

Tip: Use older cards for small purchases, like subscriptions or occasional expenses, and pay them off monthly to keep them active.

5. Errors on Your Credit Report

Why It Matters: Errors or inaccuracies in your credit report, such as an incorrect late payment or a fraudulent account, can cause your score to drop unfairly. These mistakes can stem from reporting errors by lenders or identity theft.

What to Do:

• Review your credit report regularly. You are entitled to one free credit report per year from each of the major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com.
• If you spot an error, dispute it immediately with the credit bureau and provide supporting documentation.
• Monitor your credit for suspicious activity that may indicate identity theft.

Tip: Resolving errors promptly can quickly restore your credit score and protect your financial health.

Final Thoughts

A drop in your credit score can happen for several reasons, including late payments, increased utilization, hard inquiries, account closures, or errors on your credit report. By understanding these key factors, you can take targeted steps to improve your credit health. Regularly monitor your credit, pay bills on time, and manage your credit wisely to maintain a strong score.

Remember, credit scores are dynamic, and with consistent positive habits, you can recover from setbacks and work toward achieving your financial goals.