Here’s Why Your Credit Score Is Dropping for “No Reason”

published Feb 23, 2019
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You consider yourself responsible with credit: You pay your bills on time and you don’t rack up any major credit card debt. And since you’re looking to apply for a mortgage sometime in the near future, you’ve been actively monitoring your credit. But since you’ve checked last month, your score has gone down.

What gives? Why is your score acting so sensitive? Sheesh.

Time to play detective: The first step in cracking the credit mystery is understanding what factors affect your score, and by how much.

Here are the five factors that make up your score, according to FICO, a popular credit model:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • Credit mix: 10 percent
  • New credit: 10 percent

Now, within each of those categories, there can be surprising nuances that may cause your scores to fluctuate. I asked credit and finance experts to explain some of these lesser-known reasons your credit score may be dropping. Here’s what they said:

1. You forgot to pay a fine

Gone are the days where you were simply charged a dime a day for late books and your unpaid parking ticket was a matter between you and your traffic cop. But now the government will commonly send both types of outstanding fees to debt collectors if they’re over a certain dollar amount, says Leslie Tayne, a debt resolution attorney and managing director at Tayne Law Group in New York.

“Once they go into collections, your score will drop,” she says.

2. You applied for car insurance

Applying for a mortgage, auto loan, apartment, or credit card aren’t the only times a hard inquiry will be pulled on your credit. But if you’ve recently applied for something like insurance or a new cell phone plan, they might have pulled a hard credit check. Unfortunately, this can bring down your score, Tayne says.

3. You paid off your car loan

You pay off an installment loan (like a car loan, or a mortgage, or your student loans), and you’d expect your score to shoot up because you proved that you’re responsible with credit after all. Au contraire!

“Surprisingly, paying off a loan such as a car loan or student loan can cause your credit scores to drop,” says Oliver Browne, credit industry analyst with Credit Card Insider, a credit card comparison and education site.

“This is because your mix of credit accounts becomes less diverse,” he says.

Having just one type of credit account won’t improve your credit score as much as maintaining a richer variety of accounts, such as revolving and installment loans, will.

But ultimately, experts say, don’t sweat the small credit drops that happen after you pay off a loan because your score will typically bounce back within a few months.

4. You cancel your credit card

You got your credit card balance down to $0. Congrats! But, think twice before you close it out, as it can lower your score. (And if you’ve had it open for a while, prepare for a double whammy.)

“One, it lowers your total credit history age—or how long you’ve had credit accounts open—which is a factor in calculating your score,” says Mike Pearson, a personal finance expert and founder of Credit Takeoff, a research-driven personal finance site for people looking to improve their credit.

Two, it also lowers your available credit, which could increase your credit utilization ratio, he explains.

5. Your credit usage was a bit too high

Speaking of credit utilization ratio, you’ve probably heard you’re not supposed to use more than 30 percent of your credit line. But you may think this is A-OK to go a bit over, so long as you pay down the balance within a month. However, it could be that your creditor is reporting your payment and balance information to the credit bureaus before your due date, meaning there’s a higher utilization rate on your report for a bit. Because report dates and due dates don’t always sync up, it’s a good idea to ask your card issuers when they report your information to the bureaus.

Don’t think this applies to you because you only use cash or debit? You may want to rethink that strategy. Here’s what happens to your credit when you only use your debit card.