Buzz
With the help of platforms like Credit Karma and Credit Sesame, checking your credit score is more accessible than ever. While minor changes in your score, such as a shift from 720 to 725 or from 680 to 670, are typical, a sudden drop of 30 or more points could signal a problem. What steps should you take if you notice a significant drop in your credit score overnight?
The first step is to determine why your score dropped so you can address it. There are only three possible reasons for a sharp decline in your credit score: missed payments, high credit utilization, or a security issue. This insight comes from Adam Levin, a cybersecurity expert who shared his thoughts at CardCon, a conference I attended last week focused on the credit card industry.
Let’s explore each of these potential causes so you’ll know how to respond if you check your credit score online and find it much lower than expected.
You missed a payment
Take a look through your inbox and that stack of mail on your kitchen counter for any overdue bills that may have been overlooked.
Credit card companies, lenders, and other organizations report your payment history to the credit bureaus every month, so you often have a bit of time before a late payment negatively impacts you. However, any payment that’s 30 days late or more can appear on your credit report. Your report won’t include your score, but it does display all the information that affects your score, such as overdue bills.
If you haven’t already used your three free annual reports (one from each of the major credit bureaus), visit AnnualCreditReport.com to get a current copy. If an unpaid bill is the reason behind your score drop, it’ll show up in the payment history for that specific account.
If you’ve already accessed your free reports for the year, a free credit monitoring service can help you track your account standing and let you know if everything is in order.
What to do: If one of your accounts shows as overdue despite your certainty that you've paid, reach out to the lender or utility company to verify your status. If everything checks out, you can dispute the error on your credit report. If the issue is that you genuinely missed a payment, it’s crucial to catch up as soon as possible. Once the lender reports your payment, you may see a small but immediate boost in your score, although it might take several months for your score to fully recover.
You’re overusing credit
The second largest factor in your credit score, after your payment history, is credit utilization, which refers to the amount of debt you carry. If your balance-to-limit ratio (for example, the amount on your credit cards relative to your total available credit) is too high, your score will drop. Experts recommend keeping your utilization below 30%, and the lower your ratio, the better your score will be.
If you’ve recently made a large purchase on a credit card or taken out a new loan, you may notice your score dropping.
What to do: As you reduce your balances, your score will begin to rise. Paying off large balances in full will give you the fastest boost to your score, and you'll likely see an improvement within three months (delinquencies typically appear on your credit report more quickly than paid loans).
When you pay off a credit card, don't close the account! Keeping that available credit can make you more attractive to future lenders, and a lower utilization rate will help strengthen your credit score.
There may be a security issue.
Review the credit report you pulled. Do you spot anything odd? Maybe an account you don’t recall opening or a credit card charge that seems too high? This could be a sign of identity theft.
What to do: Start by contacting the credit card company or lender to report the fraud or theft. You should also place fraud alerts on all your other financial accounts. Be sure to file a police report, and notify the Social Security Administration and the IRS about the suspected identity theft.
Getting everything back to normal might take months, so prepare yourself for a long and frustrating process. Even once everything is resolved, you'll need to remain vigilant, regularly checking your financial accounts for any signs of delayed fraud activity.
If everything checks out on your credit report, take a moment to secure your identity and credit by freezing your credit with each of the credit bureaus—it’s free! This prevents anyone from opening new accounts in your name. Additionally, set up security alerts with your credit card issuers. It may seem tedious now, but it’s a small task that provides significant peace of mind in a world full of data breaches.
Whenever you need to make a major purchase with new credit, you’ll have to unfreeze your credit. Keep in mind that freezing your credit doesn’t stop criminals from stealing your current card information. To safeguard against that, check if your card issuer allows you to lock your card, which you can do anytime online or via your card’s app. This prevents anyone, including yourself, from making purchases until you unlock it.
