17 Aug 7 Reasons Your Credit Score May Suddenly Drop, Even if You Never Miss a Payment
- Changes in your credit utilization, whether caused by increased spending or a reduction in available credit, will negatively impact your credit score.
- Skipping payments without getting pre-approval for a forbearance, results in a late or missed payment and will hurt your credit score.
- Shifting your spending to credit cards in an unnatural way, or opening new accounts or lines of credit can both negatively impact your credit score.
Credit is an integral part of building financial stability. High credit scores lower the cost of debt, improve insurance rates, reduce deposit requirements, and is often a factor for employment.
The COVID-19 global pandemic, and its economic fallout, has millions of newly unemployed workers worried about maintaining good credit during these uncertain times. Even if you pay bills on time, you could see your credit score fall for any of the following reasons:
- Your credit card company reduced the amount of credit available to you. The credit card agreement allows companies to lower limits without notice, and servicers frequently reduce lines of credit as a risk reduction strategy in a recession. During the 2008 Great Recession, 20% of banks lowered credit limits of prime borrowers, and 60% cut limits for subprime borrowers.
Credit limits directly impact your credit score because 30% of your FICO credit score is calculated using the ratio between your credit limits and the balances carried on your accounts. This figure is also called the utilization ratio.For example, if you have $10,000 of available credit combined on two credit cards accounts, and your outstanding (unpaid) balance combined on the two cards equals $4,000, your utilization ratio is 40%.
- However, if your outstanding balance remains at $4,000, and your two creditors lower your combined available credit by 50% on the two accounts to a total of $5,000, your utilization ratio now increases to 80%, even though your outstanding balance never changed.
- You skipped a payment without first contacting your lender. On-time payments account for 35% of your FICO credit score and recently missed payments have the biggest impact. A single skipped payment can lower your score by up to 100 points and negatively impact your credit for seven years.
Due to the coronavirus, most lenders are offering payment relief through a forbearance for one or more months. In most cases, lenders continue to report the account as current. However, skipping a payment before getting an approved forbearance will result in a delinquency reported to the credit bureau.
- You increased credit card spending in a manner not typical of your prior spending history. Charging purchases you cannot pay off when the bill comes due will raise your utilization ratio and could send a signal to creditors that you are struggling financially.
When creditors see signs of financial distress, the company could lower your credit limit or close the account, even if you have not missed a payment. These actions will further increase your utilization ratio and could negatively impact your credit score in as little as 30 days.
- You had a credit card or line of credit canceled due to the pandemic. In addition to lower credit limits, lenders are closing accounts. This is especially true of unused or infrequently used credit card accounts.
Closed, dormant accounts will increase your utilization ratio because it lowers your total available credit limits. The age of your Credit History makes up 15% of your FICO credit score and considers the length of time you have maintained credit. Closing older accounts impacts the history portion of your credit score.
- An automatic payment or charge exceeded your available credit after the bank reduced your limit. Surpassing your credit limit is a sign of financial trouble. It will also reflect a higher credit utilization which will impact your score even if you continue to make on-time payments.
- Your approved forbearance resulted in an over-the-limit balance. Even if the credit card company agrees to waive one or more payments, the interest on your accounts continues to accrue. When existing balances are near the credit limit, the added interest could cause you to exceed your current credit limit. Not only will this action negatively impact your credit score, it will also result in a penalty that will get added to your current payment due.
- You requested an Economic Injury Disaster Loan (EIDL) from the SBA. Applying for new credit, both personal and business will result in a hard inquiry to your personal credit file. New credit applications account for 10% of your credit score, even if you do not accept the loan.
Frequently Asked Questions
Why did my credit score drop for no reason?
You credit is impacted by several different things, but if you see a significant drop in your score for no apparent reason, go back and check to see if your available credit on your accounts was lowered without your knowledge. This will cause your credit ratio to increase, and likely lower your credit score, since the credit utilization ratio accounts for 30% of your total credit score.
Why did my credit score go down when my credit card company closed my account?
There are two reasons your score could have dropped.
- Closing the account increased your credit utilization ratio, which account for 30% of your credit score.
- Closing the account affected the age of your credit history, which makes up 15% of your credit score.
Why did my credit score drop after requesting financial assistance under the Economic Injury Disaster Loan (EIDL) program?
Even if you did complete the full application for the EIDL loan, you did provide consent on the short form application to allow the SBA to pull your personal or business credit file to make a preliminary underwriting decision. All hard inquiries on your credit report can negatively impact your credit score.
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