My Credit Score Dropped 20 Points: Should I Be Worried? Here’s What Experts Say

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You recently noticed that your score has dropped by 20 points or so. This concerns you because, with higher interest rates, you realize that you could have trouble applying for a loan in the near future. With Americans’ credit card debt increasing by $50 billion in the final quarter of 2023, you don’t want to get stuck in a terrible financial cycle.

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Should you be worried if your credit score drops by 20 points? Here’s what the experts had to say.

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Why Did Your Credit Score Drop 20 Points?

When your credit score drops, you might already be aware of the mistake you made — or you might not be sure what what caused it.

Some of the most common reasons for a credit score dropping include:

• You paid off a loan.
• You applied for new credit.
• You missed a payment.
• You closed an account.
• You maxed out a credit card.

According to FICO data, your credit score can drop by anywhere from 17 to 37 points if you have a fair credit score and a 30-day missed payment is reported. The impact increases with a higher credit score — the same missed payment could reduce an excellent credit score by up to 83 points.

When you apply for a new credit card, the issuing company will conduct a “hard inquiry,” pulling your credit report to determine how much of a risk you are when it comes to loaning money. This credit check could temporarily lower your score.

Maxing out a credit card or making a major purchase would also hurt your score, as your FICO credit score heavily weighs revolving balances and credit utilization.

Paying off a balance and closing an account could also temporarily lower your credit score for a few reasons: You’re reducing your credit mix, your total available credit is down, and, if the account was your oldest, it impacts your credit history. However, it’s important to remember that paying off debt is always a wise financial strategy.

Should You Be Worried About Your Credit Score Dropping?

The answer to this question depends on which of the two scenarios you’re experiencing.

Scenario 1: You Expected a Drop

If you already recognize the move you made that would lead to a drop — like applying for a new credit card or car loan — you should be able to recover.

“Credit scores tend to fluctuate on a regular basis and take small hits here and there,” said Daniel Cohen, credit expert and founding partner of Consumer Attorneys. “Did you make a late payment on your credit card this month or spend a bit more than you usually do?”

Cohen explained that when you apply for new credit and “authorize several companies to pull your credit while shopping for deals, you can expect each pull to drop your score by about 5-10 points and the new trade line — credit card or auto finance loan — to drop your score by 5-10 points.”

Erika Kullberg, an attorney, personal finance expert and founder of Erika.com, agreed. “A 20-point difference might sound big, but average fluctuations are normal and occur due to everyday credit activities, including credit inquiries, higher credit use or if you’ve closed a long-standing account.”

“In this instance, you shouldn’t panic,” she said. “The damage done depends on your starting score; a small drop from a high score can mean you remain in safe territory, while a drop from a lesser score can put you into a higher risk category for loan terms.”

Thomas Brock, CFA, CPA, expert contributor for Annuity.org, also pointed out that the effect depends on your credit score before the drop — and on whether you’re expecting to finance anything else in the short term, before your score has time to recover. “If a decline pushes you into a lower credit score category, it will inevitably cost you the next time you take out a loan.”

Generally speaking, if you know what caused your credit score to drop, you shouldn’t be too worried, because you can always resolve this by taking the proper steps and waiting to see the positive changes reflected in your credit score.

Scenario 2: You’re Confused About the Drop

If you don’t know why your credit score decreased, on the other hand, you need to find out.

“An unexpected 20-point drop in your credit score is something to take seriously,” Cohen said. “This can be a red flag for all kinds of problems, including unauthorized hard inquiries, credit reporting mistakes, identity theft, etc. You should investigate, never ignore, an unexpected drop of more than a few points.”

What Can You Do If Your Credit Score Dropped by 20 Points?

Here’s what you should do immediately when you notice any drop in your credit score.

Review Your Credit Report

“There could be an error or fraud on your report that you need to contest and have removed, which is why it’s important to check your credit report regularly,” said Todd Stearn, founder and CEO of The Money Manual. “When you notice an unexpected drop in your score, get your credit report and see what the cause is, so you’ll know what steps to take from there.”

Make Your Payments on Time

“Above all else, you want to keep paying on time, because this is the single most important factor of your credit score,” Kullberg said. “If your credit score is down because you missed a payment, then all you can do is focus on making prompt payments moving forward.

Don’t Apply for Any Credit

You may not want to apply for a car loan or a home mortgage right after your score has dropped, especially if the decrease put you in a lower category with less-favorable loan terms.

Kullberg added, “Avoid unnecessary new credit applications to prevent further impacts from hard inquiries.”

Stay Patient

“Hard credit inquiries fall off your report relatively quickly in the credit world — usually within two years — and once you start making full, consistent, timely payments toward any new debt, your score will increase,” said Cohen. “So a fully informed, anticipated 20-point drop is something to be cognizant of but nothing to panic about.”

Closing Thoughts

Brock concluded, “Regardless of the financial ramifications, a 20-point drop in your credit score should not be ignored. The first thing you should do is identify the cause — missed payments, increased credit utilization, credit reporting errors, etc. Then, take corrective action, whether this means diligently making all future debt payments on time, reducing your debt load or disputing erroneous information reported by a credit bureau.

“Being proactive and fiscally responsible are essential to bolster one’s creditworthiness.”

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This article originally appeared on GOBankingRates.com: My Credit Score Dropped 20 Points: Should I Be Worried? Here’s What Experts Say