How Quickly Can Your Credit Score Drop?

How Quickly Can Your Credit Score Drop?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated August 3, 2022

Your credit will determine the likelihood of you being able to get approved for various loans, including mortgages, car loans, and personal loans, among others. Given that, it’s important to understand how your credit works and why it may suddenly drop if you aren’t careful with your finances.

How Quickly Can Your Credit Score Drop?

How fast your credit score can drop depends on a few things, including the number of accounts in your credit file and how often your creditors report to the credit bureaus. 

Your credit scores are generally updated as new information is reported to the credit bureaus. Lenders and creditors typically report your credit information to the credit bureaus every 30 – 45 days. However, some lenders may report it more often, while others may report it less frequently. Moreover, not all lenders report your information on the same day, so your credit report may be updated with new information more frequently, particularly if you have multiple credit accounts. 

The constant flow of information being sent to the credit bureaus can then impact the calculation of your credit scores. As such, your credit scores may drop very quickly, especially if you missed payments on multiple credit accounts. 

How Much Can Your Credit Scores Change? 

Even though there may be a lot of changes in information being reported, that doesn’t necessarily mean that there will be a major difference in your credit score. While some factors can significantly change your scores, others may only make a minor difference. 

What Can Cause Your Credit Scores To Drop Quickly?

Your credit scores are calculated using a number of factors, each of which can cause your credit scores to drop quickly. Here are some reasons your credit score can drop quickly: 

Missed Or Late Payments 

One of the biggest factors that can impact your credit scores – both positively or negatively – is your payment history.  Your payment history generally accounts for more than a third of your credit score.  As such, late or missed payments can negatively impact your scores and can cause it to drop quickly and suddenly. Moreover, missed and late payments can continue to impact your credit as it can stay on your credit report for as long as 7 years. 

Number Of Hard Inquiries 

Hard inquiries can negatively impact your credit scores, especially multiple hard inquiries within a short time frame. If you’ve applied to too many credit products within a short period of time, it can cause your credit scores to drop suddenly. 

Low Average Age Of Accounts

Another factor that can cause your credit scores to drop is the average age of your credit accounts. Generally, the older it is, the better it is for your credit scores. As such, if you close an old credit account or open a new account, it could cause your credit scores to drop, as it reduces the average age of your accounts.  

High Debt-To-Credit Ratio 

Your debt-to-credit ratio is another factor used when calculating your credit scores. As such, changes to your ratio can cause your credit scores to fluctuate. Generally, it’s best to keep your debt-to-credit ratio at 30% or below. Higher ratios, particularly maxed out credit limits, can cause your credit scores to drop. 

Public Records

Negative remarks such as a tax lien, judgments and bankruptcy can severely hurt your credit scores. For example, if you file for bankruptcy, you’ll be denoted a credit rating of R9 which is the lowest credit rating you can get. Such public records can cause your credit scores to drop quickly.  

Debts Sold To A Collection Agency

As mentioned, your payment history has a huge impact on your credit scores, so if your debt is sold to a collection agency due to unpaid debt, it can significantly negatively affect your credit. Moreover, you’ll also receive an R9 credit rating, which is the same rating you get when you file for bankruptcy.  

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Can Your Credit Score Drop After Paying Off Debt?

You might notice that your credit score takes a hit even after paying off your debt. Why is this?

The truth is, getting a perfect credit score isn’t an easy feat, as there are dozens of variables that are factored into a credit score calculation. For starters, paying off your debt doesn’t necessarily translate into a higher score. Similarly, paying off a loan doesn’t necessarily mean your score will drop. However, if you do notice a drop, it may be because of two reasons: 

  • Credit Utilization – if you paid off your credit card account in order to close the account, that could potentially lead to a credit score drop as you’ll be reducing your available credit limit which may increase your debt-to-credit ratio. For instance, if you have 2 credit cards each with a credit limit of $10,000 and you have a balance of $5,000 on one of the cards, your credit utilization ratio is 25%. If you cancel one of your cards, your credit utilization ratio would jump to 50%. 
  • Average Age Of Accounts – When you pay off an installment loan, that account closes which can reduce the average age of your accounts. This in turn, can cause your scores to drop.  

How To Avoid A Sudden Credit Score Drop? 

The best way to prevent any sudden drops in your credit scores is by being financially responsible. Proper management of your finances and credit products will help you avoid any quick drops in your credit scores. Here are a few things you can do: 

  • Create a budget – A budget is a basic tool you can use to better track your spending and ensure that you have enough money to pay your monthly debt obligations. 
  • Pay Your Bills On Time – As mentioned above, your payment history generally accounts for a large percentage of your credit score. As such, paying your bills on time can help you avoid any sudden drops in your credit scores. If you are diligent about making all of your debt payments on time and in full, your credit score will benefit and you should enjoy a healthy credit rating.
  • Keep Your Debt-To-Credit Ratio Under 30% – Keeping your debt-to-credit ratio below 30% is recommended and approved by most lenders. Higher ratios can negatively affect your credit scores, so you can either keep your purchases low or simply pay your bills twice within the same cycle to keep it low. 
  • Don’t Open Up Too Many New Accounts – Opening too many new accounts will decrease the average age of your credit scores. So be sure to only apply for a new credit product when you really need it. 

Want to know what happens if you only make your minimum monthly payments? Learn about the minimum payment trap.

FAQs On Credit Score Drops

Why did my credit score drop for no reason?

Your credit scores can drop for a number of reasons, some of which can be easy to miss. Drops in your credit scores can happen even when there’s no obvious changes in your credit report such as paying off an account, closing a credit card account, and even not using any credit. 

Why hasn’t my credit score changed? 

If you only have one credit card that you use and have been responsibly paying off each month for years, then your credit score may not change very often. The reason being, that there isn’t much change happening from month to month. 

How many months does it take to improve your credit score?

The amount of time it takes to see an improvement in your credit score will vary from person to person. In general, those with a lot of negative remarks will take a longer time to improve their credit score than someone with a few negative remarks. 

What is a credit score?

In Canada, credit scores can be anywhere from 300 to 900 points. Lenders use credit scores to evaluate a borrower’s likelihood to repay their debt on time. In order to get approved for various types of loans, a credit score of 650 is typically required. Any less than this will make it much harder to obtain a conventional loan. Lower credit scores also typically mean a higher interest rate will be charged, which translates into a more expensive loan. 

Final Thoughts

Your credit score matters a great deal when it comes to taking out loans. It can go down rather quickly if you make financial blunders along the way and can take a while to repair. Your best bet is to make sure it stays within a healthy range from the get-go. But if you’ve made some mistakes in the past and are now in need of improving your credit score, there are steps you can take to improve it. Speak with a financial advisor to help guide you in the right direction to improve your credit score.

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Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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