Why Did My Credit Score Drop 50 Points in Four Months?

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Reader Question: "At the end of last year, my middle credit score was around 730. I checked it again recently and was surprised to see it had dropped to 680. I haven't changed anything, financially speaking. Why did my credit score go down 50 points in only four months? Is it because I've checked it twice in that time? Does checking it too often make a score drop?"

Checking your score twice within four months should not cause it to drop by 50 points. That's a pretty significant reduction -- the kind of reduction that usually results from negative information on your credit report (such as a late payment or a maxed out card). So let's explore some of the factors that can cause this to happen.

Why Did My Credit Score Go Down?

There are many things that can cause a credit score to go down, and some of them are less obvious than others. So it's possible you've missed something along the way.

Here are some of the most common causes for a score reduction:

1. Unpaid Bills / Late Payments

A single late payment on a credit card or loan account could cause your score to drop by 50 points, or even more. In fact, your payment history influences your credit score more than any other factor. So if you've missed one or more payments, and the creditor has reported it, you might have found the cause. Sometimes, these errors are obvious. Other times, a person might not even know about a late or missed payment until it lowers their score. Check your credit reports with all three bureaus (Experian, Equifax and TransUnion) to see if any late payments have been reported by a creditor. This should be one of the first steps in your investigation.

2. Lower Limits

If your credit card company lowered the limit on your card, it could negatively affect your overall score. A lower limit can inflate your "utilization ratio," which measures how much of your available credit limit you are currently using. A lowered limit on one or more cards will make it appear that you are using more of your total available limit, which is a big factor in the credit-scoring models these days. Have your limits been lowered within the last few months, during the time period when your score dropped? If so, this may be the cause.

3. Credit Usage Increased

This is another way you could increase your utilization ratio, thereby causing your score to drop. If your credit limits have stayed the same, but you are using more of those limits, it can have the same negative effect on your score. A "double whammy" can occur when you are using more of your limit at the same time the limit has been lowered by your card issuer. This will make it appear (to a scoring model at least) that you are maxing out your credit cards. This is another red-flag risk indicator that can cause your score to go down.

4. Closing a Credit Card Account

Believe it or not, closing a credit card account can cause your score to drop. This may seem counterintuitive, and it confuses a lot of people. But there's a reason for it. The utilization ratio mentioned above is calculated across all of your accounts. So if you close one particular account that has a low balance, and keep one or more accounts with high balances relative to their limits, you would end up with a higher total utilization ratio. This could have a negative effect on your score going forward.

5. Errors on Your Credit Report

In a perfect world, you would never be penalized for mistakes on your credit reports since they are not your fault. Unfortunately, the consumer reporting industry is far from perfect. A Federal Trade Commission (FTC) study from a couple of years ago found that one in five reports had errors in them. Remember, this raw information is used to produce your credit score. So these errors have the potential to make your score go down over time. Fortunately, they are fairly easy to find and fix. Start by getting your free credit reports from AnnualCreditReport.com (a federally regulated website) and fixing any errors you come across. Many financial experts recommend doing this once per year, to coincide with the free report you are entitled to each calendar year.

6. Applying for Credit

If you have been applying for a lot of credit cards or store / retail accounts recently, it could have a negative impact as well. Normally, this wouldn't cause a 50-point drop in four months, as you have seen. But it could be a contributing factor. When you make many inquiries and credit applications in a short period of time, it has an even greater affect. Still, this factor is not nearly as strong as the ones listed above. But it deserves mention.

It's important to note that any one of these factors could cause your score to drop, on their own or in combination with one another. For instance, a single late payment on a credit card could lead to a reduction of 50 points or more -- all by itself. A delinquent payment combined with a higher utilization ratio could lead to an even bigger reduction. These factors have a cumulative effect.

Scoring models are incredibly complex with many overlapping variables. So it might be hard to find the exact cause of the problem. But with a bit of "detective work," you can probably spot the most likely cause or causes.

Disclaimers: This article answers a reader's question, Why did my credit score go down 50 points over a few months? The list above includes some of the factors that can cause a score to drop. But this list is not exhaustive. There could be other causes as well. This is merely a starting point for additional research. This information has been provided for educational purposes only and does not constitute financial advice.