It’s hard to overestimate the importance of those three numbers — the credit score — to financial well-being. Having a good credit history is an advantage if you’re looking for a new apartment, buying a new car with a loan, or want to improve your financial situation. But here’s the twist. Sometimes, a credit score can drop even if you make timely payments on your loans and bills.

Knowing the possible reasons can help you choose the right strategy and keep your credit score in tip-top shape. Let’s explore what can cause a drop in credit score even when you’ve been paying your financial obligations in a timely manner.

Why Did My Credit Score Drop?

In this article about ” Why is My Credit Score Going Down When I Pay On Time” It can be frustrating to check your credit score and notice a small decline. Usually, people can identify a specific reason or reasons for a sudden drop, but if your activity remains the same, you may be wondering why my credit score dropped?

It is normal for your credit score to fluctuate by a few points. However, a significant drop of 15 to 20 points should be alarming and worthy of investigation to determine the problem.

You may find that you have been the victim of credit reporting errors or possible identity fraud. In other cases, you may determine that the decline is the result of your own actions. Read on to discover some of the factors that go into calculating your credit score to explain why your credit score has suddenly dropped.

How is your credit score determined?

Before delving into the possible causes of a sudden drop in credit score, let’s take a quick look at the factors used to determine your credit score. You may have noticed that you have more than one credit score. This is because lenders use two main predictive scoring models to determine the risk of lending you money.

The most common scoring model is FICO. They claim that 90% of major lenders use the FICO score. Their scoring model is based on the following factors:-

Payment History (35%)
Balance Amount (30%)
Length of credit history (15%)
Credit mix (10%)
New Credit (10%)

The second most popular scoring model is this. These are the factors they used to determine your credit score.

• Payment history (40%)
• Age and type of credit (21%)
• Credit Utilization (20%)
• Total Balance and Debt (11%)
• Recent credit behavior (5%)
• Available Credit (3%)

FICO generally use the same metrics, but the importance of specific factors can cause slight differences between the two scores.

Why did my score drop when nothing changed?

Unfortunately your credit score can go down due to factors beyond your control. However, such cases are rarer than usual. Often, overall changes in your credit activity affect your credit score more than you think.

Let’s dive into some of the possible reasons for a sudden drop in your credit score, even though you may not notice that your behavior has changed.

Credit Utilization has Changed Dramatically

One of the main reasons your credit score will drop significantly is because of an increase in your credit utilization ratio. The credit utilization ratio shows the amount of credit used compared to the amount of credit available. Credit utilization is a subset of outstanding amounts in the FICO scoring model.

If you’ve used your credit card recently, your credit utilization may have increased, which could be one reason your credit score suddenly drops. For example, if you have a credit card with a $10,000 per month limit and you use $4,500, your credit utilization ratio would be 45%.

A good rule of thumb to use when thinking about credit utilization is to consistently keep it between 10% and 30%. if possible, the less the better.

If you’ve analyzed your credit report and determined that your credit utilization rate is the main reason for the decline, there’s no need to panic too much. Keeping your utilization between 10% and 30% should improve your credit score within a month.

However, if you think you’ll use your credit card more, you can request a card limit increase, which can help your overall utilization rate.

Reduction in Credit Limit

A credit card issuer can reduce your credit limit at any time without notifying you. Although the card company is not required to notify you of limit reductions, they generally notify you within 45 days of any changes to your account terms and conditions.

Credit card companies set your credit limit based on your credit score, income and credit utilization ratio.

A reduced credit limit won’t negatively affect your credit score, but it does relate to the last point with your credit utilization ratio.

Using the figures above, your original limit was $10,000, and you typically spend $4,500 per month on your credit card. At that time your credit utilization rate is 45%, which is more than the recommended amount. Now, if your credit card company lowered your limit to $2,000, and your balance was $4,500, that would increase your credit utilization ratio to 56% ($4,500/$8,000).

If you find yourself in this type of situation, you may want to contact the lender to discuss why your limit was lowered and whether they can increase it. If that doesn’t work, paying the current balance would be an option.

An account was Closed or Paid

According to a 2019 Credit Card Insider survey, nearly 30% of people surveyed believe that closing a credit account will improve their credit score. This is a popular misconception, and closing an account will hurt your score.

Account closure affects your credit score because it will reduce the average age of all your accounts. Lenders like to see that you have a long history of on-time payments. In general, the older the account, the more likely it is to have a higher score.

Additionally, paying off debt in installments, such as a mortgage, student loan, or auto loan, can cause your score to drop suddenly. This is because you will have a low credit account in your name. Blending credit is important because it gives lenders a general idea of ​​how to manage multiple loans at once.

This should not stop you from paying off your debts as quickly as possible. Credit mix is ​​one of the least important factors. It won’t take long for your score to recover.

You have started a Tough Inquiry

There are two different types of questions: hard and soft. A soft inquiry or soft credit check is usually when a person or company checks your credit history to verify your background. A hard inquiry or hard credit check usually occurs when a lender, credit card issuer, or other financial institution examines your credit history when making a lending decision.

A soft inquiry will not affect your credit score and will be reported as a soft credit check. On the other hand, hard inquiries will temporarily negatively affect your credit score.

Some of the most common examples of hard questions include-

• Mortgage applications
• Credit application
• Student loans
• Personal loan applications
• Auto Loan Application
• Apartment rental applications

One hard inquiry will drop your credit score suddenly, but multiple hard inquiries in a short period of time, such as four per year, can cause major problems when applying for new lines of credit.

Derogatory Marks on Your Credit Report

Derogatory marks on your credit report are often caused by a borrower failing to make loan repayments as agreed. Some of the most common reasons your credit card issuer may place a derogatory mark on your credit report include:

• Late payment
• An account sent to collections
• Bankruptcy
• The demand
• Tax rights

Derogatory marks are usually more difficult to remove from your credit report. While rigorous inquiries can take up to two years, a derogatory mark will typically remain on your report for seven to potentially 10 years. This means your credit score can be negatively affected by the offending mark for almost a decade. However, as time goes by, the offending mark has significantly less impact on your credit score.

There were Errors on Your Credit Report

Cases of incorrect information on your credit report are not as rare as you might think. According to recent research from Consumer Reports, one-third or 34% of participants have found at least one error on their credit report. Additionally, errors on credit reports are one of the most common problems that the Consumer Financial Protection Bureau deals with on a daily basis.

Some common errors on credit reports include as-

Mistakes of identity

Includes, but is not limited to, a false name, address or telephone number

The account may belong to another person with the same name

Incorrect account information due to identity theft

Incorrect account status reporting

Closed accounts can be reported as open accounts

Reported as the owner instead of the authorized user of the account

False reporting of late or overdue payments

Incorrect last payment date, opening date, or first late payment date

The same loan is listed multiple times

Debt management mistakes

Entry errors after correcting the information

Accounts listed multiple times with different creditors

residual errors

Improper current balance

Wrong credit limit

So how do you correct an error on your credit report? As a credit consumer, you have the right to dispute any information you believe is inaccurate with credit bureaus and reporting lenders. They are required to investigate any dispute free of charge. If errors are confirmed, they must correct the information immediately.

It is always important to periodically review your credit report for possible errors. According to the Federal Trade Commission, you are legally required to get a free copy of your credit report every 12 months.

To get a free copy of your credit report, visit annualcreditreport.com or, if you’re a member of Arizona Central Credit Union, use the SavvyMoney tool to get your free full credit report.

You are a victim of identity theft

The worst case scenario, and possibly the scariest reason for a sudden drop in your credit score, is that you are a victim of identity theft. Although it may sound scary, there is no reason to panic. You can take actionable steps to recover your account and reverse the damage done by the fraudster.

The first step in identifying identity theft is through credit monitoring. You should monitor your credit score and credit reports. This will help you notice anything out of the ordinary faster than checking your account periodically.

If you have been a victim of credit card fraud, you should establish a recovery plan. Placing a fraud alert on your credit file should be your first action. You can place a fraud alert on your credit file by contacting one of the three national credit bureaus. Once you contact one of the offices, the other two will be automatically notified.

The next step is to file an identity theft report with the  Federal Trade Commission (FTC). From there, you can begin to dispute questions about your report if you feel it’s necessary.

Learn more about your credit score

Credit scores are an important metric when you’re ready to make a big purchase like a home or car. They are also effective when it comes to applying for additional credit cards, applying for an apartment, or applying for additional loans.

Here, you’ll get the information in why is my credit score going down when I pay on time. So you’ll find the ways……….

Ways to Improve Your Credit Scores

If you want to improve your credit score, these tips may be helpful to you.

Pay your bills on time. This is one of the most important steps to getting and maintaining a good credit score. The best way to pay on time is to set up automatic payments so you don’t miss any bills. But make sure you have enough money in the linked bank account to avoid overdrafts.

Reduce overall debt. If possible, don’t use credit to buy items you can’t pay for in cash or pay off before the end of the month. This keeps your payments manageable and your credit utilization rate low. Your goal should be to bring your credit card balance down to $0 at the end of the month.

Check your credit regularly. There are several ways to check your credit score for free and some may be paid. Doing so can help you quickly identify a drop in your score and make corrections in the right direction if necessary. Experian’s free credit monitoring can help you monitor your FICO® score and credit report, and will keep you updated on any changes to your credit report.

Avoid applying for unnecessary credit cards. Not only do some cards have expensive annual fees, but a large number of cards can result in spending more than you can afford.

Practice responsible spending habits. Setting a budget, even a simple budget that categorizes your spending into a few common items and doesn’t require much maintenance, can help you spend within your means in the long run.

How to Recover from a Credit Score Drop?

Increasing credit utilization-

Relying on credit too often can be a slippery slope. If your credit card balances start to pile up, it can send your credit score downward.

Some experts recommend using 30% or less of your available credit. So always keep in mind that changes to your credit limit can affect your credit score.

Excessive credit inquiries-

There are soft and hard credit inquiries, and both can have different effects on your credit score.

Hard inquiry-

A hard inquiry is when a financial institution checks your credit and needs your permission when making a lending decision. Hard credit inquiries are often reflected in your credit score. While one or two inquiries here and there may not be noticeable, multiple inquiries in consecutive months can potentially lower your score.

Soft inquiry-

A soft credit inquiry is when a person or business checks your credit for reasons other than new financing, such as checking your background or getting updated information about an existing account. Soft inquiries should not affect your credit score.

Not monitoring your credit score or report-

Monitoring your credit score or report can help you spot problems early. If you notice that your credit score is dropping and you know it’s not your fault, you may be a victim of identity theft. You can request to your credit company for a free copy of your credit report every 12 months.

If you suspect you are a victim of identity theft, report it to the Federal Trade Commission, which will provide you with an identity theft report and recovery plan. You can also contact credit reporting agencies to issue fraud alerts or freeze your accounts.

Maintaining a strong credit score can help you qualify for financing with lower interest rates. Knowing what makes up your credit score and what can cause it to fall can take the mystery out of credit management.

FAQ about Why is My Credit Score Going Down When I Pay On Time

Why did my credit score go down if I paid on time?

You may notice a drop in your credit score after you meet your payment obligations on your loan or credit card debt. Paying off a loan can lower your credit score if eliminating the debt affects certain factors, such as your credit mix, the length of your credit history, or your credit utilization ratio.

Why is my credit score low even though I pay on time?

f your credit card balances are high compared to your credit limits, this can have a negative impact on your score. Even if you make payments on time, a high credit utilization ratio indicates potential financial stress and can lower your score.

Why does my credit score go down when I haven t missed any payments?

All hard inquiries are recorded on your credit report and can have a negative impact on your credit score. This is especially likely if you’ve made multiple credit applications in a short period of time. This is because lenders may assume you are desperate for credit, which could deter them from lending to you.

Why won t my credit score go up even though I pay on time?

Some of the reasons why your score may not change (or increase) could be that the bureaus haven’t updated your credit profile yet, a poor credit utilization ratio, more serious negative items than recent good behavior, or errors on your credit.

How to get 800 credit score?

Making on-time payments to creditors, keeping your credit utilization low, Making timely payments to creditors, maintaining a low credit utilization level, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new lines of credit are factors that can get you into the 800 credit score club.

How to get 800 credit score?

For scores ranging between 300 and 850, a credit score of 700 or above is generally considered good. In the same range, a score of 800 or above is considered excellent. Most consumers have a credit score between 600 and 750. In 2023, the average FICO®☉ score in the U.S. reached 715.

What Is a Good Credit Score?

Why has my credit score gone down but nothing has changed?

Factors such as new credit applications and late payments can affect your credit score. You can improve your credit score in several ways, such as making sure you are on the voter registration list, managing accounts well and limiting new credit applications.

How can I boost my credit score fast?

Tips for raising your credit score quickly

Pay off your revolving credit balance. If you have the money to pay more than your minimum payment each month, you should do so.

Raise your credit limit.
Review your credit report for errors.

Request that negative entries that have been paid be removed from your credit report.

Yours True Friend & Finance Advisor
Harry Bhagria

About Me...

My interest in finance and business started early since childhood. I have 
extensive experience managing finances, running businesses and advising on
loans. My expertise includes Credit Cards, Business Loans, Personal Loans, 
Vehicle Loans, Education Loans and the Stock Market.

My main Objective, Aim & Goal of life is to share my knowledge with everyone, 
even those unfamiliar with finance, so they can understand how to effectively 
manage money and grow their wealth....
                                       
....HARRY BHAGRIA....Know More in Detail...