Why Credit Score Drops When Nothing Changed
Did you know that sometimes a credit score drops when nothing changed? Let me clarify; your credit score could drop just because you do the right things, like pay your bills off entirely.
It’s odd when you think about it, but a credit score is an abstract conceptualization that controls so many aspects of your life. The only comparable comparison is the law.
The law is different from city to city and state to state. And yet the law is all-powerful, all reaching, and final in its judgment.
But the law is intangible and can only be manifested in the form of police officers and similar authority figures.
Well, a credit score works in a similar manner.
You can actually have three different credit scores. And there is more than one credit bureau. However, the Fair Isaac Corporation, also known as FICO, is the most prominent one.
Over 90% of all high-finance lenders and lending companies refer to FICO scores before making their decisions.
Your credit score, a three-digit number, is assigned to you by credit bureaus and the calculations of computer algorithms that autonomously average out your past credit use.
And your ability to apply for credit, a loan, buy a house, get a job, pay for utilities, start a business, and many other activities can be ultimately decided by a credit score.
All you have to do is pay your bills on time and in full and you will steadily gain a perfect credit score of 850.
Well, just like the law, credit scores, and the way they can affect your personal finances, can manifest themselves in abstract ways.
For example, a credit score drops when nothing changed. Or rather, nothing negative necessarily happens.
Why does this happen? Let’s start by thoroughly explain the credit score first.
Credit Score Drops When Nothing Changed Disclaimer
As will soon be explained, there are many reasons why your credit score may drop.
Your credit score may drop temporarily and stabilize itself within days or weeks. How long depends on the reasons, innocuous or not, for the event to occur in the first place.
Don’t panic and think about how the credit score drop might have occurred.
The Credit Score
Your credit score is a three-digit number that is a reflection of your overall creditworthiness. The lower your credit score, the less creditworthy you will seem to potential lenders.
And the higher your credit score, the more creditworthy you will seem to potential lenders.
The credit score is the business model formula for credit bureaus and financial lenders.
This is how your credit score is categorized by most credit bureaus. Each bureau uses a different variation of these three-digit scores, but here is the general standard:
- An Excellent credit score ranges from 800 to 850
- 740 to 799 is a Very Good credit score range
- A Good credit score ranges from 670 to 739
- Fair credit scores range from 580 to 669
- A Poor credit score ranges from 300 to 579
The average credit score held by most Americans is 688, which falls in the Good Credit range.
Your credit score is calculated by advanced computer algorithms, and the sum of your credit history, via several factors:
- The types of credit you own (10%)
- New credit accounts you open (10%)
- The totality and averaging of your credit history (15%)
- Your credit utilization rate (30%)
- Your total payment history (35%)
So, if a credit score drops when nothing changed, especially if you are responsible with credit, it can happen for a variety of reasons.
Canceled Credit Cards
Have you responsibly paid off all or some of your credit cards? Congratulations. Many people go through their entire lives without entirely paying off their credit.
However, the worse thing in the world you can do is to then cancel those credit card accounts.
Your entire credit history is based on the use of every credit card you have ever used. From your first credit card to your newest one, each charge you make is recorded on your credit history.
Imagine that you cancel the first credit card you ever owned after 10-years. Well, a ten-year gap will instantaneously appear on your credit score.
That will cause your credit score to drop. It can drop precipitously before it levels out. Depending on the number of credit cards you keep, your credit score will be lowered accordingly.
Other Reasons Your Credit Score May Drop
If you increase the amount of credit you have by over 30%, that may cause a temporary drop in your credit score. The normal credit utilization rate is 30%.
If credit bureaus see that you are using over 30% of your available credit, you may be seen as a risk.
Have you applied for new credit? That may cause an autonomous algorithm to temporarily lower your credit score.
Have you been paying your credit card bills late? Newly implemented FICO scoring metrics can drop your credit score by 20 points for habitually paying your bill late.
Have you fully paid a mortgage, car loan, or personal loan? That can also cause your credit score to dip temporarily.
Credit Score Drops When Nothing Changed (Stay Calm)
If your credit score drop is related to positive personal financial circumstances, like paying debts in full, stay calm.
Credit card scores are maintained by computer algorithms. It may take a few days or weeks for your credit score to stabilize.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.