How Do You Recover from a Credit Score Drop?
Harrison Pierce is a writer and a digital nomad, specializing in personal finance with a focus on credit cards. He is a graduate of the University of North Carolina at Chapel Hill with a major in sociology and is currently traveling the world.
At a Glance
A drop in your credit score can be scary, so it is important to have a plan to bounce back. You can take steps to improve your score: reviewing your credit report, paying your bills on time, reducing your credit card balances, not applying for new credit, and considering credit counseling.
It’s essential to be patient and consistent with your efforts to improve your credit score. It may take some time for your credit score to recover, but if you follow these steps and maintain good credit habits, you can successfully rebuild your credit over time.
What makes up a credit score?
A credit score is a three-digit number determined using an individual’s credit history. It’s calculated based on various data points, such as how long an individual has had established lines of credit, their repayment activity, and the different types of credit cards they have. The score reflects how effectively an individual has managed their financial affairs in the past and is a measurement of their reliability in repaying debts. A high score falls within a range of 680 or above, whereas a low score will fall below this. Understanding what makes up your credit score is essential for getting loans in the future and helps build financial security for years to come.
There are five main factors that are used to calculate your credit score. These are:
- Payment history: This includes whether you have made your payments on time and whether you have any outstanding debts or unpaid bills.
- Credit utilization: This is a measure of how much of your available credit you are using. It is generally recommended to keep your credit utilization below 30%.
- Length of credit history: A longer credit history can be seen as a positive factor in your credit score, as it demonstrates your ability to manage credit over time.
- Credit mix: This refers to the variety of credit accounts you have, such as credit cards, mortgages, and loans. A diverse mix of credit accounts can be seen as a positive factor in your credit score.
- New credit: Opening too many new credit accounts in a short period of time can be seen as a negative factor in your credit score, as it may indicate that you are taking on too much new debt.
It’s important to note that credit scores can vary depending on the specific credit scoring model being used. Additionally, the weight given to each of these factors may vary depending on the credit bureau or lender.
Related: How is your credit score calculated?
When can your credit score drop?
Several situations could cause your credit score to take a hit. For example, if you make late payments on credit cards, mortgages, or other loans. Additionally, an increase in your overall level of debt could also cause a decrease in your credit score. Your score may also be negatively impacted if you have large amounts of money tied up in-store financing plans or open too many new accounts in quick succession – both of which indicate a higher risk to creditors. If a creditor closes or cancels one of your accounts due to nonpayment, this will likely result in a dip in your credit score. It’s essential to be mindful of what activities can affect your credit score, so it’s wise to use caution when making financial decisions and handling unpaid debts.
1. Multiple applications
Applying for multiple credit cards quickly can harm your credit score because applying for new credit usually results in a hard inquiry on your credit report. These inquiries can remain on your report for up to two years, and each one can lead to a slight drop in your score. Additionally, numerous applications in a short period can indicate to lenders that you are highly reliant on borrowing money. Unsurprisingly, this can lead to lenders viewing you as at higher risk of not meeting repayment obligations and may reduce the likelihood that they will approve you for credit.
2. Late payments
When you miss or make a payment past its due date, it is reported by the lender to the major credit bureaus. This results in a negative mark being added to your credit report, which can dramatically drop your credit score. Thankfully, if you recognize the issue and work to fix it quickly by getting caught up with your payments and reaching out to the reporting agency, you may be able to undo some of the damage done to your score. It’s essential to act fast and stay on top of all payments for this approach to work.
3. Reduced credit limit
Reducing a credit card limit can severely affect one’s credit score. Depending on the amount and percentage of the reduction, it could lower a credit score by several points and damage one’s creditworthiness. Decreasing an allocated limit signals to lenders that the holder is prone to excessive borrowing or, if the account is reaching its limit, that their current debt repayment is unreliable. Therefore, reducing your credit card limit can reflect poorly on your financial management skills and cause long-term harm to your credit score.
4. Closing your credit account
Closing a credit account can negatively affect a person’s credit score. The length of one’s credit history is a notable factor in determining the credit score. Closing an account that has been open for longer will likely shrink the amount of time a consumer has access to credit, resulting in a decrease. Furthermore, any outstanding balance at the time of closure will be included in their debt-to-credit ratio, which, if too high, can cause scores to decrease substantially. Lastly, suppose an individual closes all their accounts or multiple accounts simultaneously. In that case, all their accounts or multiple accounts simultaneously could appear to creditors that they are dealing with financial problems or attempting to hide existing debt issues. All these circumstances could lead to a significant decrease in an individual’s credit score.
5. Outstanding balances
Missing loan and credit card payments can cause an outstanding balance to grow. When this happens, lenders report negative information to the credit bureaus that can significantly damage your credit score. Even one missed payment can result in a drastic drop in points; however, it’s significant to note that the longer an outstanding balance remains unpaid, the more dramatic the plunge becomes over time. This is because creditor reporting gives more emphasis to recent performance than older events as a measure of overall creditworthiness. Therefore, efforts to reduce and eliminate personal debt should be prioritized before it is too late.
6. Credit report errors
The most common errors include discrepancies in personal information and inaccurate records about loans. For example, incorrect balances, lateness on payments, or even unpaid past debts could mistakenly appear in an individual’s credit history, which would cause an unjustified decrease in one’s score. Therefore, it is important to carefully check your credit report and dispute any inaccuracies with the relevant agency to ensure your score is healthy.
7. Paying off debt
Paying off debt can decrease your credit score because significant changes in the balances of your accounts are seen as a sign that you’re experiencing financial difficulties. This activity, known as credit surfing, will almost always result in a short-term decrease in the credit score. Additionally, when you pay off and close an account, the average age of all your accounts drops and thus lowers your score. Additionally, depending on factors such as how much available credit was used before paying off a debt or the types of debt paid off, it is possible that this could put additional negative pressure on one’s score. If you have several cards and decide to close one right after paying it off completely, bear in mind that this could lead to a decrease in your credit score since it would reduce your overall available credit limit.
Learn more: Why did my credit score drop after paying off debt?
8. Identity theft
Identity theft is a serious financial crime that should not be taken lightly. If you suspect someone has stolen your personal information, you must take immediate action to protect yourself. When someone steals your identity, they might open new credit accounts in your name and run up large debts without informing you. This debt will show up on your credit report, causing your credit score to drop substantially. Of course, this can significantly impact any future applications for loans or mortgages you wish to apply for. Taking the necessary steps early on can help minimize the damage done by identity theft and prevent further drops in your credit score.
9. Blemishes on your credit report
Having blemishes on your credit report can be severe for anyone trying to maintain a good score. When lenders look at an individual’s credit report, they primarily look for payment history. If there are any late payments or delinquencies on the report, it will likely cause the score to drop significantly. Additionally, credit utilization can affect a score significantly as well. Utilizing too much of one’s available credit limit can lead to a lower score since it indicates that someone may be overusing their credit and unable to pay back their loans in time. Therefore, people must monitor their reports and address issues quickly to ensure their scores remain high.
How can you recover your credit after a drop?
Once your credit score drops, recovering it may feel a bit daunting. But the good news is that it is possible! The most important thing you can do to recover your credit score is to commit to creating a budget and sticking to it. Take a close look at your income and expenditures and create a clear plan to adjust spending and saving habits. Additionally, regularly review your credit reports from all three agencies, as mistakes can occur occasionally. Finally, take advantage of resources such as debt consolidation or consumer credit counseling which could help pay off debts more quickly. Put in the effort, and with some time, your credit score will likely bounce back.
1. Identify the primary reason for the drop
Identifying the primary reason for a drop in credit score can be overwhelming, but it’s essential to determine the cause before taking steps to improve your score. To find out what caused the decline, check your credit reports from each of the three major bureaus—Experian, Equifax, and TransUnion. You can pinpoint issues such as late payments or past-due balances by scanning your reports for any negative information that could have contributed to a lower score. The closer you look at your credit report, you will start seeing patterns and monitoring any discrepancies so that you can address the issues with creditors and correct inaccurate information if needed. These proactive steps can help you get back on track with repairing your credit score.
2. Eliminate debt
Paying off debt can be difficult but doing so has numerous benefits that can help you recover a drop in your credit score. Becoming debt-free will reduce the monthly payments you need to make and give you more control over your expenses and boost your savings. Taking the time to pay off each debt one at a time will help reduce the principal balance associated with it, reducing your total credit utilization – a key factor when calculating your credit scores. Additionally, eliminating these debts will mean fewer credit inquiries due to closing those accounts, which can also lead to an overall increase in your credit score. Reaching financial freedom is possible and paying off debt is the first step toward recovering from a credit drop.
3. Get rid of delayed payments
Delayed payments are payments made past the due date, which can negatively impact your credit score. It is possible to eliminate these late payments and improve your credit score by taking proactive measures. These steps can include staying organized with due dates, setting up payment reminders, creating and following a budget, and considering automatic payments if possible. Additionally, speaking to collections agencies and understanding your rights can assist in resolving any overdue balances and clearing them off your credit report. Taking proactive steps to reduce or eliminate delayed payments can help support your financial goals and build healthy habits.
4. Remove errors on credit reports
Keeping your credit score high is vital for many reasons, including applying for loans or credit cards. If your credit report shows incorrect details or mistakes, it can harm your score. Fortunately, you can remove any discrepancies from your credit report and improve or restore it. First, check if all of the information in the report is accurate. If something appears inaccurate, contact one of the three leading credit bureau agencies – Experian, TransUnion, or Equifax – and dispute the error. It’s important to provide evidence proving why they should remove the error in question and take necessary steps to ensure an independent third party authenticates any proof of claim. Once an agency has reviewed the entry in question and determined that it should be removed, your score can increase.
5. Consider a credit repair company
When your credit starts to decline, seeking help from a reputable credit repair company can be the key to restoring it. A reliable credit restoration company can help you identify any errors or negative items impacting your score and then leverage their expertise in dealing with creditors and credit bureaus to resolve those issues. Through a customized plan tailored to your unique circumstances, they can also develop strategies for improving and increasing positive items on your report and offer sound financial advice to establish spending habits that will promote future credit recovery. Working with a reliable credit restoration service provider is a proven way to restore your creditworthiness and rebuild your score.
Related: How to build credit?
How long will recovering from a credit score drop take?
It is possible to bounce back from a drop in your credit score. However, the amount of time it will take for a full recovery does vary depending on the individual. Generally, it can take several months to a few years to fully restore your good credit standing. Specific steps you can take will help expedite the process, such as paying off any delinquent accounts, removing errors on your credit report, and keeping your current account balances well below their maximum limits. With these actions and discipline over time, you should be able to once again establish an excellent rating with the three major bureaus.
Even after taking a dip, it is possible to increase a credit score. By taking the necessary steps to get back on track with payments, rebuilding credit can be accomplished in a few months by following certain strategies, such as regularly checking a credit report, limiting the number of times new credits are applied and ensuring payments are made on time. Additionally, disputing any errors found on reports can have an immediate and favorable effect on the score. If the individual cannot increase their credit score alone, it can be beneficial to seek professional advice from an accredited debt counseling agency that has experience reversing drops in one’s credit rating. With careful planning and diligence, it is possible to reverse a drop in one’s credit score.
A credit drop typically lasts up to seven years, though this timeline may differ depending on the situation. Credit scores are primarily out of a consumer’s control, such as if your information has been affected by identity theft or fraud. It is vital to take immediate steps to report any fraudulent activity that has taken place so you can begin to rebuild your credit. Also, consult a financial advisor for best practices to restore your score; sometimes, the most impactful changes come from small day-to-day choices and behaviors. Repairing your credit score can be an arduous task but certainly not impossible – it’s simply a matter of taking the proper steps.
A drop in any amount on a credit score is considered significant. However, a large drop would be defined as one where an individual’s score moves down more than 100 points. This can be caused by missing payments, overutilization of available credit, or pursuing too many loans. Changes to financial behavior and spending habits, in addition to regularly checking one’s credit report, are ways to help manage and prevent a significant drop in their credit score.