7 reasons why your credit score dropped

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Noticed a recent drop in your credit score? There’s no need to panic, as credit scores change all the time. But, it’s worth the effort to look into the factors that may have caused it to dip so you can take steps to reverse that trend.

What is a credit score?

Your credit score is a 3-digit composite of your financial history, specifically focused on your habits of borrowing and repaying money. To have a credit score, you must have opened accounts, borrowed money, and paid it back at some time in your life. Most people start with a low to average credit score and gradually increase it over time. 

Common reasons for a dropped credit score

Your credit score is dynamic, and you’ll experience periodic rises and falls throughout your lifetime. Here are 7 of the most common reasons why your credit score can take a sudden dip, along with some steps you can take to get it back up.

1. Recent application for new credit

When you apply for a new line of credit (like a credit card, mortgage, or auto financing),the lender will do a hard inquiry of your credit report. A hard inquiry (also known as a hard credit check or a hard pull) grants access to your borrowing and payment history so institutions can decide whether or not to lend you money.

Most people have hard inquiries on their report, but having too many in a short period of time can be a red flag. Lenders want to ensure you’re not taking out too much credit all at once, so be thoughtful about making requests that might trigger a hard pull. The good news is that hard inquiries fall off your credit report after two years.

Looking for a new credit card without the downside of a hard inquiry? The Varo Believe Credit Card offers no hard credit check to apply, no minimum security deposit, and no annual fee or interest*. It's designed to help you build your credit and keep track of your progress.

2. Late or missed payments

Forgot to pay a bill last month? It happens to the best of us, but this may be the reason your credit score is taking a dip. Once you’re 30 days past the due date on a bill, institutions report the loss to credit bureaus. The good news is that if you pay off your overdue bill within 30 days, there’s no harm to your credit score.

We recommend setting up monthly auto-payments—that way there’s no chance of forgetting! This is especially important because on-time payments count for more than 30% of your overall credit score.

3. Derogatory marks on your report

Unfortunately, extreme financial hardships are a reality for many. Major shifts in your financial status, like declaring bankruptcy, going into collections, or experiencing a foreclosure, can prompt a derogatory mark on your credit report from your lender. 

Unlike hard inquiries, derogatory marks stick around for quite some time—most will appear on your credit report for up to 7-10 years. We understand that if you encounter such a situation, many factors may be out of your control due to extreme circumstances, and this is more of a recommendation to avoid a derogatory mark if you can.

4. Higher utilization of credit

The second most-important factor in determining your score is your credit utilization ratio. If your limit is $10,000 and you have a balance of $5,000, you’re using 50% of your total credit limit. 

Lenders see lower credit utilization ratios as evidence of responsible spending and the ability to pay off debt month over month. 

Aim to keep your ratio below 30% (if you can go below 10% total, even better). If you’re running a balance that’s much higher, you may see the effects on your credit score, especially if you keep a high ratio month over month. 

5. Closing a credit card

Here’s a common (yet probably unexpected) culprit of credit score drops—closing an old account. Lenders prefer accounts to stay active, even if they’re not carrying balances. Keeping old accounts open also ensures that your total credit limit stays higher, which helps your credit utilization ratio.

If you’re considering closing a credit card account, take this approach instead—set up a recurring monthly payment (like a utility bill or subscription) using the card to keep it active, and ensure it’s paid off every month. 

6. Paying off auto and/or student loans

This one almost seems counterintuitive. You’d think that paying off large amounts of debt would help your score, right? 

Lenders like to see a mix of credit, so when you pay off an auto loan or student loan, it’s not uncommon to see your credit score drop by more than a dozen points. This is because these loans are sizable, and once you pay them off, you’ve narrowed your credit mix and total credit limit. It’s still a best practice to responsibly pay off your loans, but keep in mind that this is a possibility once any of your accounts are paid in full.

7. Credit report inaccuracies

If you’ve crossed off all the other potential scenarios, it’s possible that there’s been a mistake made on your report by a lender or that you’ve experienced some form of fraud. If that’s the case, you’ll need to dispute incorrect information with the 3 major credit bureaus (Experian, Equifax, and TransUnion), who are obligated to investigate and either verify, correct, or delete the data.

Keeping a close eye on your credit report or paying for credit monitoring is a smart way to ensure you’re always on top of what activity is being factored into your score. Fluctuating credit scores are a part of life, but if you take the precautions to minimize a dip or the steps to reverse it, you’re helping to ensure the long term health of your finances. 

*To be eligible to apply for the Varo Believe Card, you need to have received Qualifying Direct Deposits of $500 or more in the past 90 days to your Varo Bank Account. A Qualifying Direct Deposit is an electronic deposit of your paycheck, pension or government benefits (such as Social Security) from your employer or the government. Tax refunds or government stimulus payments, person- to- person payments (such as Venmo) and funds deposited using a Varo routing number are not considered a direct deposit.

Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.