A minor drop in your credit score — like the less-than-five-point drop you’ll temporarily encounter after a hard inquiry when applying for credit — is nothing to sweat in the long term. But a 40-point drop is more worrisome.
Are you asking yourself, “Why did my credit score drop 40 points after paying off debt,” following a credit dispute or for no reason at all? We’ll break down what might be happening to your score below.
Why Did Your Credit Score Drop 40 Points?
Your credit score is a number based on several factors that appear on your credit reports from various credit bureaus. And in fact, you have more than one credit score, though the most common one people refer to is your FICO Score. Because it’s complex — and there’s more than one — there are many reasons your credit score may have dropped 40 points.
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Reasons Your Credit Score Went Down
There are several reasons your credit score could have gone down. Here are the main culprits:
• You made a late payment (or several late payments), which were reported to the credit bureaus. A spending app can help you track upcoming bills so you don’t miss a due date.
• You paid off a loan or credit card, which decreased your average age of credit and your credit mix and also affected your credit utilization.
• You applied for a new loan, which resulted in a hard inquiry.
• You’ve increased your credit utilization, perhaps by maxing out your credit cards.
Often, a sudden 40-point decrease in your credit score is the result of two or more of these actions happening all at once or close together. A hard inquiry, for instance, results in only a five-point decrease in your credit score. But if that hard inquiry was for a credit card that you immediately maxed out and then missed a payment on, you’re much more likely to see a larger decrease in your credit score.
There’s one other important reason your credit score may have dropped 40 points: You could be the victim of identity theft, meaning someone is using your personal information to open new lines of credit in your name and then maxing them out to purchase things for them.
Recommended: How Do I Check My Credit Score Without Paying?
Should You Be Worried About Your Credit Score Dropping?
A minimal drop in your credit score is no cause for concern, but a larger drop, such as 40 points, should be alarming.
If your credit score dropped because of your own actions — overspending on credit cards, missing payments, etc. — do your best to get your financial habits back on track. Tools like a money tracker can help you monitor your spending and credit score.
However, if your credit score dropped by 40 points for no reason, you could be the victim of identity theft. Check your credit reports for signs of suspicious activity. If you notice any, you need to freeze your credit reports and begin the remediation process. Here’s how to report identity theft.
What Can You Do If Your Credit Score Dropped by 40 Points?
If your credit score has dropped by 40 points, here are some things you can do:
• Make on-time payments. Ensure all your bills are paid on time and in full, every month.
• Reduce your credit utilization. Stop swiping your credit card unless you can immediately pay it off. Pay off as much of your card as you can, but resist the temptation to spend more with it. Lowering your credit utilization is crucial to repairing your credit score.
• Keep old accounts open. Average age of credit is one of the major factors that affect your credit score. Keeping an old account open, even if you don’t use it, will help keep your score from falling further.
• Review your credit report for errors. Simple reporting errors could be hurting your score. It’s a good idea to familiarize yourself with common credit report errors and how to dispute them.
• Report identity theft. If someone has opened a credit card in your name, follow the proper steps to report the identity theft to the lender, the credit bureaus, and the authorities.
Recommended: Why Did My Credit Score Drop After a Dispute?
How to Build Credit
While establishing and improving credit takes time, there are several steps you can take now to help repair your score after a 40-point drop. Here are some basic actions you can take:
• Make on-time payments. Turn on autopay for all your bills, and make sure there’s always enough money in your checking account to cover the costs.
• Stop spending on credit. Having a credit card with a high credit limit makes it easy to spend more than you should. But you should only use a credit card if you have the money to pay it off immediately (or for emergencies).
• Keep old cards open. Don’t forget — old cards that you don’t use help keep your credit utilization down and help keep your average age of credit higher.
• Monitor your credit. Regularly monitor your credit report and dispute any errors.
• Don’t apply for credit often. Apply for credit only if you absolutely need it, like to buy a car or a house.
What Factors Impact Credit Scores?
Several factors impact your two main credit scores (FICO Score and VantageScore). The two scoring companies use different algorithms to calculate your score; we’ll focus on FICO because it’s more common.
Here are the five major factors that affect your credit score — and how much weight each one has on your score:
• Payment history: This accounts for 35% of your score. Lenders want to see that you make on-time payments for all your debts. Mortgage and rent payments, utility bills, and other loan repayments (such as credit cards or personal loans) will show up on your credit report.
• Amounts owed: This is your credit utilization, and it accounts for 30% of your score. Creditors love to see that you have a high credit limit available to you, but that you use very little of it. This shows you’re a responsible borrower.
• Length of credit history: This accounts for 15% and is why keeping old cards and accounts open is important. It demonstrates to lenders that you’ve been borrowing responsibly for a long time.
• Credit mix: This makes up 10% of your FICO Score. Lenders like seeing that you can manage a healthy mix of credit accounts (credit cards, installment loans, home loans, etc.).
• New credit: If you open too much new credit all at once, that sends a sign to creditors that you may be a high risk. This makes up 10% of your score.
Allow Some Time Before Checking Your Score
After a major drop, it’s tempting to want to monitor your credit score every day for signs of an upswing. But be patient — it can take time before you see an improvement.
While credit score updates happen fairly often, they don’t happen on a set date. That’s because a lender or creditor can send information to the main credit bureaus at different times, which will impact when a score changes. That said, you can plan on an update occurring at least every 45 days.
Closing a Credit Card Account Can Hurt Your Score
Considering closing a credit card account? You may want to think twice, as doing so could negatively impact your credit score.
When you close a credit card, the amount of your available credit decreases. This, in turn, may lead to a higher credit utilization, which as we mentioned above counts for 30% of your score. Closing a card also decreases the length of your credit history, which makes up 15% of your score.
However, there might be times when closing a credit card makes the most sense for you, such as a separation or divorce or a card with a high annual fee. The good news is, there are ways to cancel a credit card without affecting your credit score.
How to Monitor Your Credit Score
You can monitor your credit score in a number of ways. Your bank or credit card issuer may offer credit score insights in your mobile banking app, and you can check your FICO Score for free with Experian. Several money management apps offer free credit score monitoring, including access to your FICO Score or VantageScore.
Pros and Cons of Credit Monitoring
Credit monitoring services offer several advantages, but there may be drawbacks to consider.
Pros
• Real-time alerts when your score changes
• Analysis and insights to help change borrowing behavior
• Identity theft protection
Cons
• Potential cost
• May not offer insights to all three bureaus
The Takeaway
A sudden, unexpected drop in your credit score can be scary. This is especially true if you’re trying to build credit and have been responsibly paying your bills on time and keeping your credit utilization in check. It’s wise to use credit monitoring services so you’re always updated when something changes on your credit report, as it can help you spot errors or even stop identity theft before it gets out of hand.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
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FAQ
Why is my credit score going down if I pay everything on time?
Even if you make on-time payments, your credit score can drop if you open too many new accounts at once or use up all your available credit every month. A major drop in your credit score could also indicate errors on your credit report or, even worse, identity theft.
Why has my credit score gone down when nothing has changed?
If nothing has truly changed in your finances, your credit score would likely only drop because of an error on your credit report or identity theft. It’s always important to monitor your credit to stay aware of these things. If it’s not a case of error or identity theft, consider your recent credit actions: Did you max out a card or close an old account? These can lead to drops in your credit score.
Why did my credit score drop 40 points when nothing changed?
If your credit score dropped 40 points and nothing changed on your end, check your credit reports with all three major credit bureaus immediately. It’s possible there is an error or that you are the victim of identity theft, meaning someone is using your name to open new credit accounts.
Photo credit: iStock/Miljan Živković
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