Why did my credit score drop

Checking into what affects your credit score is a smart move. That three-digit number can affect your ability to reach your personal finance goals (and how much it’ll cost to do so). When your score takes a dive, it's not by chance. There are specific reasons behind it—some might be small things that you wouldn't think matter much. Don't panic. Credit scores fluctuate, and it's normal for them to go up and down. 

There are many reasons credit scores change, and sometimes, it's not anything you've done. The better you understand what factors change credit scores, the easier it is to navigate those changes. 

The usual suspects: common reasons for a credit score drop

If you've noticed a change in your credit score, there are a handful of things you might chalk it up to right away. These are some of the most common reasons to lose credit score points:

• You missed a payment (by 30 days or longer)

• You increased the balance on a credit card 

• You applied for a new credit card or loan

• One or more of your accounts went to collections

• You co-signed a loan 

• You became an authorized user on someone else’s account

• You filed for filed for bankruptcy, or foreclosure was started on your property

So why do these things matter so much?

It goes back to the way credit scores are calculated. For example, making on-time payments and paying down the balances on your credit cards can help your score. Paying late or maxing out your cards, on the other hand, can hurt. 

3 unpleasant credit surprises

Sometimes credit score damage happens through no fault of your own. And in at least one instance, doing the right thing with your money can backfire where your credit is concerned. 

Here are three scenarios in which a credit score drop might take you by surprise. 

1. Identity theft

Identity theft can ding your score in a major way if someone uses your personal information to obtain credit fraudulently. 

Say someone uses your Social Security number to open a credit card. They go on a shopping spree, racking up $10,000 in debt. Only, you don't know anything about it until six months later, when debt collectors won’t leave you alone.

Now you've got a debt that you didn't create. And you might have several months' worth of late payments on your credit report that are now dragging your score down. 

You can get fraudulent accounts removed from your credit reports. (And if you didn’t open an account, you’re not legally responsible for paying the debt.) But cleaning up a mess like that will take some effort. Visit the Federal Trade Commission website for information on what to do.

2. Credit report errors

Credit reporting errors are surprisingly common. Your credit report is a collection of information about your credit accounts. This information is the basis for your credit score. 

The kinds of errors you might find on a credit report include:

• Credit accounts that don't belong to you

• Misreported payments 

• Incorrect balances

• Incorrect credit limits

• Closed accounts reported as open, or vice versa

• Accounts incorrectly reported as delinquent or late

Pulling copies of your credit reports can help you spot any errors or inaccuracies hurting your score. You can get weekly free credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion) by visiting annualcreditreport.com. If you find errors, you have the right to dispute them with the credit bureau reporting the information.

Credit bureaus must correct or remove inaccurate information you dispute. (They don’t have to remove negative information that's accurate.)

3. Loan payoff

Paying off a loan, whether it's a mortgage or something else, is a great feeling. You don't have to make that payment anymore, and you're a step closer to financial freedom. 

But your credit score could lose some points as a result. 

It might seem counterintuitive for your score to drop because you paid off a debt, but it can happen. The reason? Once it’s paid off, the account no longer factors into your credit mix. 

Here’s how it works. You get points for having experience with different kinds of credit accounts. For example, a healthy credit mix might include a credit card, an unsecured personal loan, a car loan, and a mortgage. If you only have a credit card and a mortgage, and you pay off the mortgage, you're suddenly lacking in the credit mix department.

Credit mix doesn’t account for very much of your credit score — only about 10%. So if credit scores were exams and you missed the entire credit mix section, you could still get an A-minus on the test. You don’t have to open a new account to get points in the credit mix department.

Paid-off accounts still count in other ways. Accounts closed in good standing stay on your credit reports for 10 more years. The payment history on your paid-off account and its age contribute to your scores during that time.

Mysteries unveiled: why scores can and do change

Credit scores can change because the information that feeds them changes. Your score is recalculated whenever there's new activity (including the passage of time) on your credit reports.

How much of an impact that activity has depends on what the new data is. 

Late payments have the biggest impact, because payment history carries the most weight in credit scoring. Similarly, maxing out or paying off a credit card account can cause a significant change in your score the next time your balances are reported.

Here's another thing to understand about credit scores: it's usually easier to lose points than gain them. That doesn't mean you can't recover if your score drops. But it might take time to get your scores back on track. Implementing small changes, like automating on-time payments, lowering credit card balances to help your credit utilization, and avoiding applications for new credit could all make a positive difference. 

Proactive steps to monitor and protect your credit score

You can track your scores from month to month, so you’re less likely to get surprised by a credit score change.

Credit monitoring services can give you a snapshot of your score, and alert you when there's new activity on your credit reports. That way, you can quickly work on getting any lost points back. 

For example, say you get a credit monitoring alert that a new credit card was opened in your name. Only you don't remember filling out an application. You can contact the credit card company to let them know that it's a fraudulent account. You can also freeze your credit reports so no one else can open accounts using your information. 

There are many free services online that offer credit monitoring. Start by checking with your bank, credit union, or credit card issuer. 

What's next

• Check your credit score for free to learn what factors are influencing your score. 

• Review your credit reports for errors, and dispute any you find. 

• Set up account alerts with each of your credit cards to notify you of suspicious or potentially fraudulent activity.