If you’ve been monitoring your credit score recently and noticed your credit score drop, it can be nerve-racking. Especially if you're getting ready to apply for a loan or mortgage. There are a number of obvious reasons your credit score may drop, including late payments or maxing out cards. There are also some lesser known reasons for a falling credit score.

The following are all reasons your credit score may have dropped recently.

1. Late Payments

FICO and other credit score agencies place a lot of importance on your payment history. To credit companies and lenders, late payments are signals that a person may not be financially stable, or are unable to pay back their debts. Late payment history can have a significant impact on how creditworthy you appear to lenders. Make sure you stay on top of bills, and get in contact with your creditor if you are unable to pay on time.

Most importantly, payments that are over 30 days late are automatically reported to credit bureaus and reflected on your credit score. You can avoid this problem altogether by sticking to your budget and setting up auto pay to make sure you don't accidentally miss a payment.

2. Unpaid Debt Went To Collections

A random late payment or missed payment every now and again is not likely to make or break your credit score. However, if you establish a pattern of these habits and fall behind on payments regularly, your unpaid debt may get sold to a collection agency. This gets included on a credit report and will definitely count against you - and will almost certainly causing a noticeable dip in your credit score.

For a debt to get sent to collections, you generally have to miss your payments entirely for 6 months in a row - so to avoid getting collections, try to work out a payment plan with your creditor if you are unable to make minimum payments


3. Large Purchases

Though it is important that you use your credit regularly in order to seem creditworthy, large purchases on a credit card or taking out a large loan may cause your credit score to drop temporarily.

This has to do with your available credit balance, and can affect your credit utilization. Try not to use more than 30% of your total available credit across all your revolving accounts such as credit cards and store cards.

Large purchases that make you get nearer to your credit limit may cause your score to go down, even if you pay the balance off completely when it is due. This is mostly because credit card companies report your balance on the last day of the cycle – before you have payed it off. So on your credit report it seems as if you've just made a big purchase and have not payed it off.

4. Using Your Credit More Often

It is not only singular large purchases, but simply using your credit more often that may also be causing your credit score to drop. However, the problem usually comes back to using more than 30 percent of your total available credit limit.

What typically happens is a person starts using credit cards regularly with the plan to pay them off at the end of the month in hopes to increase their credit score. This can be difficult to keep track of, however, and these payments can take them higher and higher towards their credit limit – again, not a good sign on a credit report.

5. Lowered Credit Limits

Lowered credit limits have the same effect as using your card more. A lowered credit limit means your overall credit utilization goes up, which can lower your credit score.

6. Paying off a loan

This is counter intuitive, but paying off a loan may make you seem less creditworthy in some cases. Lenders like to see that a person has a variety of different types of debts they are able to handle, such as credit lines, mortgages, and loans. If you pay off a loan, your report has less diversity and you may have a lower score because of it. This effect is usually temporary.

7. Applications for Credit, Loans, or Mortgages

While having a variety of debt is a good sign you can handle credit from a lender, too much debt is also a bad sign. New applications for credit, loans, or a mortgage may be an indication that you are financially struggling or cannot handle your current credit, and could cause your credit score to go down.

The other issue with these applications is that financers send out hard inquiries against your account, which themselves cause a small dip in your credit score. While one hard inquiry is nothing to worry about, a few of them at once may cause a noticeable drop in your score. If you spot any unauthorized or inaccurate inquiries on your credit report.

8. Closed or Canceled Credit Cards

This can seem confusing, but if you cancel or close out old credit accounts, you may notice your credit score take a hit.

In these cases, you are essentially wiping away the information from that old account. However, because credit history is important on a credit report, closing an older account may make it seem as if you don’t have as much credit history, thus causing the dip in your score.

Closing an account also causes your overall credit utilization to increase, as it wipes out the available credit from this account. If this causes you to get closer to your credit limit, especially if your utilization rises above 30%, you may notice a drop in your credit score.

Final Note

These are just some of the reasons your credit score may have dropped recently. It is important to keep these in mind and avoid them however possible if you are going to fix your credit score and keep it high. In general, if you use your credit responsibly and make regular, on time payments - you should end up with a good credit score.

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