But sometimes when you check your credit score you might see an unexpected drop. If this happens, don’t panic. It’s normal for scores to fluctuate, and a small dip likely isn’t cause for concern.
However, if your credit score drops by more than a few points, or if it continues to fall steadily over time, there may be a more serious problem you’ll need to address.
This guide will walk you through some of the reasons your credit score may have dropped, and offer advice about what you can do to get it back on track.
What made my credit score go down?
Here are some common reasons why your credit score may have dropped without warning:
1. You applied for a loan or credit card
Each time you apply for a loan or new credit card, the lender will pull your credit history from one of the major credit bureaus (Equifax or Transunion) before deciding whether to approve your application or not. This is called a “hard inquiry,” and it can decrease your credit score by several points.
The good news is that a dip in your score from a hard inquiry is usually temporary, and it should go back up again soon.
What to do:
Unfortunately, hard inquiries are just a part of life when you apply for new credit. Continue to keep an eye on your score, and avoid applying for any new loans or credit cards until you see that it has returned to normal.
Stacking up hard inquiries in a short amount of time can cause extra damage to your credit score, so it’s a good idea to space out your applications, and only apply for loans or credit cards that you’re confident you’ll be approved for.
2. You made a large purchase
If you put something pricey on your credit card or dipped into your line of credit recently, it may have affected your score. That’s because using more of your available credit bumps up your credit utilization ratio, a key factor in determining your score.
Basically, your utilization ratio is the amount of credit you’re currently using divided by the total amount of credit available to you. It’s typically recommended to keep your utilization ratio below 30%. So if your available credit sits at $10,000, you should only be using $3,000 at most.
What to do:
The easiest way to get your credit utilization ratio below 30% is to pay off your existing credit card balances. If you have a history of paying off your balances in full each month, you might want to ask your credit card company to increase your limit, which will bring your utilization ratio down even more (as long as you don’t start spending more).
If you’re worried that large purchases, like dental work or home renovations, will bump your credit utilization past 30%, look into whether the companies offer a payment plan. That way the purchase won’t appear on your credit card all at once and hike up your credit utilization ratio.
3. You missed or made a late payment
Your payment history is the most important part of your credit history – it accounts for 35% of your total score. That means that even one missed or late payment can cause your score to take a nosedive.
Any payment that’s more than 30 days past due will result in your credit card company reporting you for delinquency to one of the two major credit bureaus, Equifax and TransUnion. Payments that are late by 60-90 days or more will ding your score even further.
Unpaid bills will end up going into collections, which means that your lender will hire a debt collection agency to try and recover the money you owe. Any debt you have that goes into collections will stay in your credit report for 7 years and cause serious damage to your score.
What to do:
First things first: make the payment that you missed, as soon as possible. If you stay on top of your payments moving forward, your score will eventually start to improve.
It can be helpful to set a reminder on your calendar app for all of your recurring payments. There are also a number of free credit monitoring services available that will send you an email reminder every time you have a payment due.
4. Your credit limit was lowered
If one of your credit card issuers lowered your limit while there was still a balance on your card, it may have caused your credit utilization ratio to rise and your credit score to drop.
For example, if you had a $3,000 balance with a $10,000 limit, that’s within the recommended utilization ratio of 30%. But if your credit limit was lowered to $5,000, that same balance would put your credit utilization at 60% – not ideal.
What to do:
The best way to get your utilization ratio down is to pay off as much of your existing credit card balance as you can.
If you’re not sure why your credit card limit was lowered, contact your card issuer to get the details — and ask whether there’s anything you can do to bring your limit back up. And if you have multiple credit cards, look into whether you can raise the limit on any of the others.
5. You closed a credit card
Whenever you close a credit card, it lowers your available credit and causes your credit utilization ratio to go up.
Closing a credit card also reduces the average age of your credit accounts, which makes up 15% of your credit score. Essentially, the longer your credit history, the better your score will be.
What to do:
Whenever possible you should keep old cards open, and make a tiny purchase every few months. That shows the issuer that you’re still using the card, and your account won’t get deactivated.
If your credit card has a high annual fee, contact the issuer to see if they can keep your account open while switching you to a card without a fee.
If you really want to cancel one of your credit cards, close your newest account to avoid shortening your credit history by too much. And make sure to keep an eye on your credit utilization ratio afterward, in case it shoots up above 30%.
6. Someone else missed a payment
If you cosigned on a loan or a credit card for a friend or family member, you’re responsible for making sure the payments are made on time.
When the person you cosigned for misses a payment or runs up a large balance, it’s your credit score that’s on the line, unfortunately.
What to do:
If you’re worried the person you cosigned for might not be able to make their payments, you should set up the account so that you can monitor it online.
Schedule a reminder on your calendar app for a few days before the monthly payment is due, and check the statement to make sure that it’s been paid up.
In the event that the payment has not been made, you might need to cover it yourself if you want to prevent your credit score from taking a hit.
You should also consider having a discussion with the person you cosigned for, and explaining that your credit score has been affected. It might be a bit awkward, but, unless they start making timely payments, the only alternative is to close the account.
7. There’s a mistake on your credit report
Although fairly uncommon, it’s possible that a mistake on your credit report may have impacted your score.
Mistakes could be the result of an on-time payment being reported as late, a payment being reported to the wrong account, or even just a small typo that transposed two numbers.
A mistake could also signal that you’ve been the victim of identity theft, so it’s important that you look into the matter immediately.
What to do:
The simplest way to prevent a mistake from hurting your credit score is to regularly check your credit reports using a free online service.
If you spot an error, you can dispute the information by writing a letter to the credit bureau that issued the report. Along with your letter, include copies of any relevant paperwork, like bank statements or credit card bills, that support your case.
Both of Canada’s credit bureaus will allow you to submit a dispute letter online or by mail.