Why Did My Credit Score Drop

Have you ever checked in on your credit score only to find that your score has decreased since your last review? Credit score drops can be normal, but sometimes they’re an indication that something has changed on your credit report.

Before you panic, learn about how your credit score is calculated, why small score changes may be no big deal, and why your score may have dropped.

What is your credit score?

Your credit score is a three-digit number that lenders use to see how responsible you are with your finances. In Canada, credit scores range from 300 to 900, with 900 being the highest possible score you can get.

Credit scores are calculated based on your credit report. There are two major credit bureaus in Canada, Equifax and TransUnion, and both calculate your score a little bit differently. However, they both consider the below five factors:

• Your payment history

• Your credit utilization rate (how much credit you use compared to your credit limits)

• Your length of credit history

• Your public records

• New credit inquiries

You can access your credit score for free at any time through Equifax’s online website. If you live in Quebec, you can also access your TransUnion credit score for free.

What is your credit report?

Your credit report is a more thorough detailing of your credit history — accounts you hold, your payment history, how long you’ve held those accounts, your current account balances and more.

A lender might pull your credit report to learn more about how you manage different credit accounts and get a broader view of your credit usage.

It’s a good idea to check in on your credit report annually, though reviewing your credit profile more often may be worthwhile if you’re working on building your credit. You can access free copies of your credit reports online through Equifax and TransUnion.

Credit score fluctuations are normal

Even if you’re practicing good credit habits like paying off your balances on time and never using more than 30% of your credit lines, it’s not unusual for your credit score to waver. And there are many reasons why.

Some are minor and temporary, like a hard inquiry for a new account, while others may be more serious. But generally, if your score changes by a few points and everything looks accurate to you, it’s likely not a cause for concern. However, if your score drops significantly, you’ll want to dig into it further.

Reasons why your credit score might go down

Here are eight common reasons why your credit score might drop.

1. You applied for a new credit account

Did you recently sign up for a new credit card or take out a new loan? Even if you were approved and have been making on-time payments, when a lender pulls your credit report, it can cause your credit score to drop by a few points.

This dip is generally temporary, though. Your score should return to normal or improve once you use the new credit line responsibly.

2. You increased your credit card balance

Another reason for a credit score drop is an increase in a credit account. When you carry a higher amount of credit, even if you still make payments on time, it can ding your credit score. That’s because your credit utilization ratio increases.

Your credit utilization ratio makes up 30% of your credit score. It analyzes how much credit you’ve used versus your total available credit limits. Most experts recommend keeping your credit utilization rate under 30% of your total credit line.

For example, if you have a $1,000 credit card, don’t carry more than $300 on that card at one time. Doing so will raise your credit utilization rate and likely decrease your credit score. This goes for all revolving credit accounts.

If you need to utilize more than 30% of your credit limit but have a plan to pay off the balance, you can. Just know you’ll likely experience a small credit score decrease. But as you lower this rate, your score should improve.

3. You closed a credit account

Did you recently close a credit card because you were tired of paying an annual fee for a card you never used? While this may make sense if the yearly fee was steep or cutting into other budgeting goals, it can also cause a credit score drop.

The length of your credit account is another factor that is used to calculate your credit score. The longer your average credit history, the better your score. If you closed one of your oldest credit cards, however, your length of credit might decrease, along with your credit score.

While there’s nothing you can do to fix this immediately, it’s helpful to know for the future. If you have an old card you don’t find valuable anymore, consider charging a monthly subscription to it each month and paying it off with autopay. This will keep the card in use and prevent your score from dipping.

4. Your credit limit was decreased

If you missed payments on a credit card account or frequently carried a high balance, the credit card issuer sometimes decides to lower your credit line. If this happens, it can lead to a credit score drop.

When your credit limit is lowered, it reduces the amount of available credit you have, which can raise your credit utilization rate. If your credit usage rate changes, it’s likely to impact your credit score, too.

If this happens, focus on paying down your credit balances to get your credit utilization rate back under 30%.

5. You missed a payment

Even if you’re careful, you can miss a credit payment. Since on-time payments account for 35% of your credit score, a mistake like this can shake up your credit report and cause your credit score to drop.

If you only recently missed a payment and have a record of good on-time payments, pay your balance, then reach out to the credit card company to see if they’ll remove the derogatory mark from your credit report. Many times, they will if it’s a first offence, but they’re not under any obligation to help.

If the late payment remains on your credit report, focus on continuing to make on-time payments in the future. Enroll in autopay to make sure you never miss a payment again.

6. You recently opened multiple credit accounts

While applying for a new credit account can cause your score to drop temporarily, if you apply for multiple credit cards or new accounts in a short period of time, it could cause your score to drop even more. That’s because lenders view multiple credit applications in a small window of time as a risk that you can’t afford your bills.

If you need to open several new accounts, try to do so within the same week or month to limit the number of times the credit bureaus report hard inquiries. And if your score does drop, the payments you make over time should help to boost it in the coming months.

7. There’s an error on your credit report

Credit bureaus aren’t perfect, and sometimes they make mistakes. If you notice an issue on your credit report, you should file a dispute with both credit agencies to try to remove it from your credit history.

A few common credit reporting mistakes could include:

• An account that isn’t yours

• A payment incorrectly noted as late or missed

• An incorrect account balance

If the credit bureau finds the information is incorrect, it will remove it from your report. This process can take one to two months, so don’t expect an immediate answer. However, it’s worth it if it will increase your credit score.

You can file disputes online at the Equifax and TransUnion websites for free. Additionally, you can reach out to your credit card provider or lender to request they fix any incorrect information being reported.

8. Your identity was stolen

If you happen to notice a credit account on your credit report that you don’t recognize, you might need to do more than file a dispute. If you suspect a fraudster has opened an account in your name, you’ll need to report it to the financial institution (your credit card provider, bank, or lender) and notify the Canadian Revenue Agency. You should also report the incident to the credit bureaus, if you haven’t already.

You can prevent further accounts from being opened in your name by placing a credit freeze on your credit report. The credit bureaus may do this automatically to protect you.

Going forward, you can also set up a fraud alert, which serves as an extra layer of protection to help verify your identity before new accounts are opened in your name. If you have a fraud alert set up, you’ll be contacted by phone to confirm a new credit account before the credit agency allows the lender or bank to view your credit history.

If you’re facing identity theft, try not to focus on your credit score. Once you work with the bank, credit bureaus, and CRA to recover your accounts and remove any unauthorized ones, your credit score should be corrected.

How to improve your credit history after your score drops

Seeing your credit score drop can be alarming, but rebuilding your credit isn’t difficult. Here are three ways to boost your score after a credit drop.

1. Make regular, on-time payments

Paying your credit bills on time each month is the best way to bring up a low credit score. It may not be the most exciting tip, but it is the most impactful one. Missing even a single payment can drag your score down.

Enrolling in autopay is The easiest way to ensure you never miss a payment. This will ensure your minimum payment (or a higher payment amount) is made on time every month.

2. Pay more than the minimum payment

Paying the minimum amount due will keep your account in the green, but paying even more can help you reduce interest charges and lower your credit utilization rate faster.

When you pay down more of your balance each month, it lowers your credit usage, which can improve your credit utilization rate and bring up your credit score.

3. Don’t charge more than you can afford

To prevent yourself from carrying credit card balances in the future, avoid charging purchases you can’t afford to pay back at the end of the month. This will lead to credit card debt, higher interest charges, and a higher credit utilization rate.

Instead, pay off your purchases immediately, so you don’t forget to earmark money for your debt payments. You might also prefer paying your credit card balances in full weekly so you’re not stuck with a high bill at the end of the month.

4. Check in on your credit regularly

Keeping an eye on your credit reports and score will keep you updated on your progress. You can access your credit report and credit score directly from the credit bureaus. Or, if you use a credit building app, like KOHO’s credit builder, you might already get your free credit score.

Not sure which service to use to check your credit? KOHO offers a unique way to build your credit score without incurring debt with its prepaid debit cards, which come with virtual card abilities. Your payment history will be reported to the two credit agencies, and you’ll even have access to a high-interest savings account with overdraft protection if you want to grow your money even more.