6 Reasons Why Your Credit Score Dropped Even If You Pay On Time

Have you ever witnessed your credit score drop despite making timely credit card and loan repayments? Your credit score is determined by several factors apart from your repayment history.

Your FICO credit score ranges from 300 to 850 and is checked by lenders when you apply for a loan, credit card, or mortgage. A score above 670 is considered "decent," meaning you have a better-than-average chance of securing a loan. A higher score improves your creditworthiness and helps ensure better interest rates, credit limits, and insurance premiums.

Credit bureaus like TransUnion maintain scores in your credit profile based on the FICO model developed by the Fair Isaac Corporation. The most widely used version remains the FICO Score 8 model despite new, more lenient models towards borrowers, like FICO 9 and FICO 10 Suite. Timely bill payments and low credit utilization influence FICO Score 8.

A credit card report contains many details, like your personal information, loan accounts, repayment history, outstanding balances, and lender remarks. These attributes play a role in determining your final credit score. FICO's latest report revealed that credit scores declined in early 2023, the first drop in a decade. High inflation, interest-rate hikes, costly borrowing, and volatile job markets have collectively strained American households' budgets.

The Federal Reserve Bank of St. Louis posted that US credit card delinquencies reached 3.1% in Q4 2023 from 1.54% in Q3 2021. Missing credit card payment deadlines will naturally lower your credit score, but there are instances when your credit score may decline despite timely payments.

Errors in Your Credit Report

According to a 2023 survey by BadCredit.Org, 31% didn't know their credit scores. Meanwhile, a Consumer Reports survey found that 34% of those who checked their score found an error in their credit reports.

Victor Ross of Wintergreen, Virginia, downsized to a condo after her 40-year-old husband passed away from a heart attack. After sorting her finances, Ross applied for a car loan to find that her credit score had dropped significantly.

Her credit profile showed a $1,200 outstanding on her PayPal credit card that she already cleared off. Ross noticed that her Experian and Equifax reports were correctly updated, but the TransUnion report had an erroneous entry that hurt her credit score.

Ross was offered a higher interest rate car loan that she could have obtained with a correct credit report. After several disputes with the credit bureau and help from Consumer Reports, she finally corrected the error in her credit profile and restored her credit score.

High Outstanding Balancing

Maxing out your credit cards is usually a red flag for lenders. If you use credit cards to pay for everything, lenders may think you need help managing money wisely, thus impacting your creditworthiness.

Keeping your "credit utilization" or the used credit limit under 30% is usually recommended to stay in good standing with your creditors. You may be wrong to think that keeping a 0% credit utilization is the ideal situation. It doesn't impact your credit score but also won't offer credit bureaus insight into how you are managing your money. This may prevent you from securing the highest possible credit score.

Sammie Ellard-King, 34, paid off his £24,000 credit card debt using the snowball method in 18 months. Despite running a business, Sammie's salary didn't match his interest payments, gradually dragging down his credit score.

The snowball method involves clearing the smallest loan first while making monthly minimums for the remaining cards. Sammie started the other way around with the most significant debt of £7,000.

He also took on side hustles and reduced social spending to boost debt reduction efforts. "If I'd just had my normal income, it would have taken as long as three or four years to clear," said Sammie. Reflecting on his lifestyle changes, he added: "It became an obsession — and I ended up clearing it all in 18 months."

Having a Poor Credit Mix

Lenders often see how you manage your mortgage payments, credit card bills, and loan repayments. Making timely repayments on different kinds of credit products elevates your creditworthiness.

Having too many or just one account on your credit profile also doesn't help your credit mix. At the same time, you may notice a sudden drop in credit score when you close an old credit card account or finally pay off long-standing debts.

This is a temporary dip that costs you time. Timely repayments have nothing to do with it. It happens because when you close a credit card account, the credit limit for that card is gone from your overall credit limit, which includes other loan accounts. Thus, your credit utilization goes up instantly.

"While your scores may decrease initially after closing a credit card, they typically rebound in a few months if you continue to make your payments on time," said Rod Griffin, senior director of consumer education and advocacy at Experian. "When you close a credit card account, you lose the available credit limit on that account...this makes your overall credit utilization rate, or the percentage of your available credit you're using, increase."

You may close a credit card to avoid overspending or to secure a new one with better benefits. Check if you can switch or upgrade to a different card to prevent this dip.

Cosigning Loan Applications

Sometimes, a friend, a relative, or one of your immediate family members may need a loan or a credit card but need a better credit score. In that case, you may offer to cosign their loan applications. You lend your good credit score and repayment history to your loved ones so that they can secure a student loan or buy a new car.

Your credit profile will only be impacted if the person you cosigned for misses payments. Your credit score will likely fall if you make late payments or become delinquent.

A LendEDU Cosigner report found that 57% of the surveyed families faced a negative impact on their credit scores after cosigning student loans.

"Many parents cosign out of love, but don't let your heart overrule your head," said Rohit Chopra, senior fellow at the Consumer Federation of America. "I'm worried that too many parents feel that if they don't cosign, they're not helping their child. The private student loan industry wants you to think that, but you don't have to do it."

You Are a Victim of Identity Theft

Have you ever noticed loan accounts in your credit profile that don't belong to you? Inquiries for loans and credit cards that you have never applied for? If yes, you could be a victim of identity theft. Incidents like unauthorized withdrawals, random medical bills, getting calls from collectors for loans you don't owe, and multiple tax returns indicate that your personal information has been misused.

Identity theft occurs when threat actors steal your personal information to open bank accounts, apply for loans or credit cards, and access social services. With threat actors increasingly leveraging AI in cybercrimes, staying updated on data safety features and practices can prevent loss of time, money, and financial status. Frauds committed in your name can also get you tied up in legal matters.

The Federal Trade Commission (FTC) recently estimated that over 1 million people were impacted by identity theft in 2023, with credit card scams being the most common crime. The deteriorating situation makes it imperative to regularly check your credit score from a service provider or leading credit bureaus.

To stay protected, activate fraud monitoring and alerts with credit bureaus to set up enhanced identity verification when someone pulls your credit report without your consent. If you suspect fraud, immediately contact the company where you think the fraud occurred and consider placing a security freeze. Remember that a freeze will lock your credit profile and can't be used to open new accounts unless the ban is lifted. You can also file a complaint with the FTC and the local police station for better coordination.

Applying Too Frequently

When you apply for a credit card or check your eligibility, lenders can conduct a "hard pull" or "hard inquiry" into your credit profile to determine if they can offer you a line of credit. Checking eligibility can also lead to a hard pull, but many online checkers don't leave a mark on your credit profile.

If you are applying far more than you should, lenders will see you as too reliant on credit products and consider you a high-risk borrower. However, a former employee of FICO and Equifax, John Ulzheimer, believes all inquiries won't necessarily have a "measurable" impact on credit scores. "But, if an inquiry is causing a score to be lower, it's no more than a few points," he said.

Thankfully, "score changes due to inquiries are usually minimal, and scores recover quickly," Griffin said in a separate interview. "Having said that, too many inquiries within a short period may be seen as a sign of financial stress and can, therefore, negatively impact your credit."

Hard inquiries stay in your credit profile for years and are visible to lenders whenever you apply for a loan. Too many loan applications also increase the risk of rejection, damaging your credit profile for years.