Your credit score can go down for a number of reasons. Let’s see why your credit score went down and what can make it drop like this.

Some of the reasons that may cause your credit score to drop are recent missed or late payments, hard credit checks, and an increase in your debt-to-income ratio.

The way credit scoring models calculate the activities that affect your credit score reflect the weight each factor has on your score.

For example, your payment history represents the most important factor in the calculation.

The next most important factor is your debt-to-income ratio. This is the amount of credit that you have available versus how much of it you have actually used. 

Another very important factor which contributes to your score is the length of your credit history. The longer and the more solid your credit history is, the higher your credit score will be.

Other factors which may influence your credit score include inaccurate information on your credit report. Yes, credit agencies can make mistakes which negatively impact your score.

So let’s dive in and have a deeper look at some of the most common reasons for why your credit score may have dropped.

Then, we will take a look at a few ways for you to recover from a hit to your score.

FICO is the most widely used credit scoring model in the United States. In your FICO Score, your payment history is the most important.

Your payment history accounts for 35% of your score and missing or being late on even one payment can have a negative impact.

This fact alone should imprint in your mind the importance of making regular on-time payments.

To help you understand how this works, if you have a payment that has been late for more than 30 days, your lender or credit card company will report the delinquency.

Once one of the main three credit bureaus receive the report, it will result in a drop in your score.

The later you are with your payments, say 60 or 90 days past due, the greater the impact on your score. If you do not make the payments, the credit issuer may hand your debt to a collection agency.

They will record this on your credit report, and it will stain your credit file for seven years.

This serves to show that if there is anything you should prioritize when it comes to your credit score, it is to always make pay on time.

Everytime you apply for a new credit line, lenders are going to require that you present a copy of your credit report in order for them to determine the risk you represent as a borrower.

This risk is what we call “creditworthiness”. The way you demonstrate you are creditworthy is by having a long history of on-time payments, low credit usage, etc.

Lenders will also look at the types of accounts you currently hold.

Every time a lender checks your credit history they perform what we call a “hard inquiry”. Hard inquiries show up on your credit report and can stay there for up to two years.

It is natural that you accumulate hard inquiries over time as your credit profile matures.

However, if you apply for too many credit products within a short period of time, hard inquiries can have a significant negative impact on your credit score.

So be mindful when applying for loans, mortgages or new credit cards. Do not overdo it, or it can reduce the likelihood lenders will approve your application.

If you use your entire credit limit on your credit card, this could cause your credit score to drop.

This is the second most important factor in calculating your FICO score, and it indicates lenders that you are not well-positioned to take on new debt.

To calculate your credit utilization ratio add all your credit card balances together and divide the result of the sum by your total credit limit.

For example, if your total revolving credit is $10,000 and you usually charge about $2,000 each month, your utilization is 20%.

This is not so bad. In fact, ideally you want to keep your utilization ratio below 30% of your total available credit. But bear in mind the best scores keep it below 10%.

Other factors which may affect your credit utilization ratio are closing a credit card and decreasing your credit limits. In both cases you will reduce the amount of credit available.

As a consequence, whatever amount you use from it will increase your utilization ratio. If you think it is financially wise to reduce your credit or close a credit card, by all means do it.

But keep an eye on your utilization ratio.

Although this is rare, mistakes do happen in your credit report. Inaccurate personal data or payment history can cause your credit score to drop.

For that reason you should always check your credit reports to ensure there is no inaccurate information in them.

If you find any inaccurate information, you can dispute it with all three major credit bureaus.

However, bear in mind some pieces of data are impossible to dispute, such as credit inquiries, credit scores and accurate birth dates.

Here are a few things you can do to improve your credit score if it has dropped.

As we have previously mentioned, if there is one thing you should prioritize if you want to maintain a high credit score or improve your current one, it is to pay on time.

Set up automatic payments and make sure you have enough money in the bank account you have connected to your card, loan or other bills so that you avoid overdrafting.

As a rule, try to not buy things on credit that you could not afford to pay cash for. This will keep your payments manageable and keep your credit utilization low. 

Have the goal of bringing your credit card balance back to $0 at the end of every month and you will be doing a great job managing your credit.

There are many ways you can regularly check your credit score. This helps you identify when there are dips in your score and make the necessary course corrections.

This will keep you from going through too many hard credit checks. Not to mention many cards have expensive annual fees, and having too many cards can induce you to spend more than you can manage.

Know how much you can spend so that you practice responsible spending habits. Credit cards are known for appealing to people’s impulses. Do not fall prey to that.

If you’ve learned something about credit scores, you know that there are many things that will impact them. Some will make it better, while some will damage your score.

One of the things that can damage your credit score is canceling a credit card. But what if you have to do it? Is there a way to cancel a credit card with no harm to your score?

The following post will give you the answer. So, if you’d like to keep a good and strong credit score, read on to learn more about this topic.