5 Reasons Why Your Credit Score Dropped Out of the Blue

Author: Dan Rafter / Source: Wise Bread

You pay your credit card accounts on time each month. You never miss a mortgage payment. You haven’t run up loads of debt. So why did your credit score suddenly drop 20 points?

You know the big reasons why your credit score might fall: late payments and a large amount of new credit card debt.

But there are other reasons that aren’t so obvious. And if your credit score did take an unexpected dip, one of these less-obvious reasons might be behind it.

1. You canceled a credit card

You might think that canceling a credit card that you no longer use is a smart financial move. If it prevents you from running up charges on that card, it might be. But closing a credit card can also cause your credit score to drop.

This is because of something called your credit utilization ratio. This ratio measures how much of your available credit you are using. The lower this ratio, the better it is for your credit score. Say you have three credit cards each with a limit of $6,000. That’s a total credit limit of $18,000. Now say you have $6,000 of credit card debt. You are using $6,000 of $18,000 of total available credit, which is a credit utilization ratio of about 30 percent. Lenders like to see this ratio around this level or lower.

If you close one of those cards, you’ll suddenly be using $6,000 of just $12,000 of total available credit — a credit utilization ratio of 50 percent. That jump could cause your credit score to take an unexpected fall.