5 Lesser-known reasons why your credit score is falling

Lauren H. Says "I subscribed to your podcast after it was recommended to me by a friend a few months ago, and have really enjoyed it. I discuss money problems with my friends more and more often and these honest conversations really help us all get a better handle on our finances.

Here's my question: every month I get my FICO credit score on one of my credit card statements and last month my credit score dropped 16 points. I checked my experian credit report and found nothing wrong. I don't have late payments, closed cards or new accounts. What could be the reason for this decline?"

Lauren, thanks for your question and for being a new listener. I know how frustrating and shocking it can be when your credit score suddenly drops for no apparent reason.

In this post, we cover 5 lesser-known reasons why credit scores can drop unexpectedly. I share tips to build your credit score as quickly as possible so the decline doesn't hurt your finances.

See also: the credit score survival kit (a free video tutorial on how to build credit fast!)

Here's how credit scores work

Credit scores can seem mysterious because they are created based on many factors in your credit report. There are hundreds of different credit scoring models used by companies such as mortgage lenders, vehicle lenders, insurers and retailers.

Every scoring model uses a complicated algorithm to evaluate your credit history. They all use slightly different factors and scoring ranges – some even use letters instead of numbers.

In addition, there are 3 nationwide credit reporting agencies (experian, equifax, and transunion) that may not have the same information about you because creditors may only report data to one or two of them. So your credit score depends on which credit report is used in conjunction with which scoring model.

FICO is one of the most popular scoring models and uses a scoring range of 300 to 850. The higher your number, the less risky you appear to potential lenders and merchants.

  • Payment history: 35
  • Amount owed: 30%
  • Age or length of credit history: 15%
  • New credit inquiries: 10%
  • Mixing credit types: 10%

Since lauren has no late payments or changes with her accounts and still had a credit score drop of 16 points, what is there to? Now, some changes to your scores may not be easy to spot because they happen behind the scenes for not-so-obvious reasons.

Related: 5 frequently asked questions about your credit score

5 lesser-known reasons why your credit score has dropped

Here are reasons why your FICO or other credit score might drop, making you seem riskier to potential lenders and merchants.

Reason no. 1: you made an expensive purchase with a credit card

Lauren didn't mention her current spending habits, but a higher than average credit card charge is one of the most common reasons for an unexpected drop in credit score.

As mentioned earlier, the amount you owe accounts for about one-third of your score. And the driving force behind them is what's known as credit utilization rate. Your credit utilization ratio is a simple formula that compares the amount you owe to your available credit limit on revolving accounts like a credit card or line of credit.

For example, if you have a credit card with a credit limit of 1.Have 000 USD and just bought a TV that will increase your total balance to 900 USD, you will have a balance utilization of 90%. In general, the lower your ratio, the better for your credit score. If you maintain an occupancy rate of less than 20%, you will receive the greatest benefit for your credit.

But wait a minute. What if you pay the $900 balance by the due date on your credit card statement? Many people mistakenly believe they can max out a credit card as long as they pay it off on time.

Here is why this does not work. Your credit card company could report your balance to the credit bureaus before your payment was received. In other words, paying off your entire credit card balance each month usually doesn't improve your utilization rate.