Why is My Credit Score Going Down When I Pay on Time?

In the United States,we can all agree that it’s very important to maintain a healthy credit score, but why is that your credit scores goes down even though you’re paying on time. There can be a number of reasons as to why your credit score went down despite making all your payments on time.

Why Is My Credit Score Going Down When I Pay On Time?

Your credit score can go down when you pay on time for a number of reasons. For example, if you apply for a new credit card or loan, you utilize more of your available credit, or open new accounts, your credit score can still go down despite paying on time. We will now discuss the reasons why your credit score may go down despite making all your payments on time in more detail below.

Applying for Credit Cards or Loans

Every time you apply for a new credit card, loan, or credit line increase, the bank or lender places what is known as a hard inquiry (hard pull) on your credit report. A hard inquiry will remain on your credit report for two years and can lower your credit score by 5 to 10 points. So, if your credit score went down even though you’re making all of your payments on time, a credit card or loan application may be the culprit for the drop in your credit score.

Utilizing More Credit

If you are using your credit cards and racking up more debt, your credit score can go down even if you’re paying on time. This is so because you’re utilizing more of your available credit and the credit reporting bureaus do not like to see your credit utilization increasing month after month. As a rule of thumb, you should try to keep your credit utilization below 30%, and even then we have noticed that as your credit utilization increases, your credit score tends to decrease. So, this might be another reason as to why your credit score has gone down even though you’ve paid on time. Also, some users have reported that too little credit utilization is bad, as well, for your credit score. So, try to use your credit cards for as many purchases as you can afford to pay off at the end of the month. This is the advice that we follow.

Paying Off a Loan

Although paying off a loan can be one of the most rewarding experiences you have, it might not be the best thing for your credit score. This is so because when you pay off a car loan or student loan, this decreases the mix of credit that you have. Having a good credit mix is something that increases your credit score. That said, you should always strive to pay off your loans and don’t postpone paying them off to keep a high credit score.

Opening a New Account

Opening a new account can temporarily cause a drop in your credit score. Opening a new account can lower your credit score because it decreases the average age of all your account. For example, if you have 2 years of credit history with one open credit card, and you open another account, the average account age will decrease, causing a slight drop in your credit score. So, this may be an additional reason as to why your credit score went down even though you’re paying all of your accounts on time. That said, make timely payments on both accounts, keep them open, and you should your score go back up.

Closing an Old Account

Closing an old account can lower your credit score for two reasons. First, it lowers your total account credit limits, which increases your credit utilization, therefore lowering your credit score. Second, it reduces your average account age, which can also lower your credit score. So, if you were wondering why your credit score dropped even though you’ve been paying on time, this could be an explanation.

Collection Account

If you have any unpaid debt, such as outstanding medical bills or a phone bill, the company you purchased services may have sold your bad debt to a collection agency and the collection agency may have added a collection account to your credit report. Collections accounts can have a devastating impact on your credit score. So, if you notice an unusually large drop in your credit score, it could be do to a collection account being added to your credit report.

One of Your Credit Limits Was Lowered

If a bank or card issuer lowers your credit limit, you could see a drop in your credit score. When a card issuer lowers your limit, this may have increased your credit utilization. An increase in credit utilization, especially above or near 30% will almost always cause your credit score to drop. This is so because the credit reporting bureaus see you as too reliant on credit. The credit reporting bureaus recommend always keeping your credit utilization below 30%. That said, we recommend you keep it lower than that because as you approach 30%, you may begin to see a drop in your credit score.

Bottom Line

If you’re making all of your payments on time and nothing negative is showing up on your credit report continue doing what you’re doing. Credit scores tend to fluctuate all the time. You may check your credit score in the morning and again in the evening and you might see a small change in your credit score, this is nothing to worry about. However, if you are seeing large swings (30+ points) something else is affecting your credit score and you should take a closer look at your credit report or contact a financial adviser to take a look at what is causing the fluctuation in your score. So, if you’re making your payments on time and nothing negative is impacting your credit score, don’t worry too much if your credit score drops a little bit as this it’s totally normal for your score to fluctuate.

Credit Score Fluctuation From Different Credit Bureaus

Your credit score will likely be different from one credit reporting bureau to another. This is completely normal as each bureau uses a different algorithm to calculate your credit score. Also, the bureaus enter information at different times, so you will likely get a different credit score from each of the bureaus. Personally, I’ve checked my credit score two days in a row and although nothing had changed on my credit report, I got a different credit score. Credit scores are always changing and although you should periodically check your credit score, you should not worry about small fluctuations as it’s normal for them to do so.

Credit Score Planet Frequently Asked Questions

1) Why did my credit score drop after I paid off my car?

Paying off your car, although great for you, may cause your credit score to drop. This is normal and we will explain. The credit reporting bureaus like you to have a good credit mix. Car loans fall under installment loans. So, if the car loan you paid off was the only installment account you had on your credit report, paying it off (effectively closes it) and reduces the great mix which you had, hence lowering your credit score. That said, don’t stress too much if your credit score dropped a little bit because you paid off your car, it will bounce back with time.

2) Why is my credit score going down when i pay on time?

As we mentioned above, your credit score may down even if you pay on time for a variety of reasons, such as opening a new account, applying for a new account, closing an old account, and utilizing more of your available credit.

3) How can I raise my credit score?

You can raise your credit score by making timely payments, not applying for new credit cards or loans, paying down your balances, and ensuring that no negative items are added to your credit report.

4) Why did my credit score drop if i didn’t miss a payment?

As mentioned previously, your credit score may drop for a variety of reasons despite making your payments on time. We discuss the reasons in much detail above.