Have you ever paid off a debt only to find that it caused your credit score to drop? A user who graciously sent me the following email:

“I have a question. I think I know the basics of my credit and credit report but I recently paid off my car loan (which I thought was a good thing) but according to creditcard.com, it dropped my score by 22 points. Can you explain why that is? I thought paying off debt was a good thing.”

Paying off debt is absolutely a very good thing. But why would it cause a credit score to drop? If you’re monitoring your credit score, particularly if you’re looking to buy a home or refinance a mortgage, 22 points can be a big deal. And it can be very frustrating, if you monitor your score from month-to-month, to pay off a loan only to see the score drop by 22 points.

I can’t pinpoint the exact reason why the credit score dropped without more information. I do not have any insight into her credit file or history. Furthermore, while the folks at FICO give us a lot of information about how they calculate credit scores, the actual formula remains a trade secret. Evaluating why a score goes up or down by a few points from month to month is very difficult.

There are, however, some common events that can cause your score to change. We’ll look at seven of them.

1. Aging of Negative Items in Your Credit Report

Events such as bankruptcy, foreclosure, or late payments are examples of negative items that affect your credit score. These events remain on a credit file for a number of years. A late payment, for example, remains on a credit file for about seven years. As these events age and move into the distant past, however, the affect they have on your credit score diminishes. As a result, as these items age, all other things being equal, your score can go up.

2. Changes in Revolving Credit Balances

Changes in revolving credit balances can cause credit scores to fluctuate. Credit card balances, for example, can change from month-to-month as you use your card, whether you’re paying off your balances in full or not. As your balances go up, your credit utilization goes up.

Credit utilization is calculated by dividing the amount of your debt on a credit card by your credit limit. For example, let’s assume you have one credit card with a $5,000 balance and a $10,000 credit limit. So $5,000 divided by $10,000 is 0.5, meaning you would have a credit utilization of 50%.

FICO looks at credit utilization both on an account-by-account basis and on an overall basis. The lower the utilization, the better.  It’s best to aim for a credit utilization of no more than 20 to 30%.

One thing to keep in mind is that these revolving balances can change from month-to-month. Hence, your credit utilization also changes. If it goes up over a threshold that FICO finds significant, your score could drop. If it goes down and crosses a threshold that FICO finds important, your score could increase.

3. Age of Accounts in Your Credit History

As your credit file and accounts age, your score can improve. FICO looks not only at your oldest account, but also at the average age of your accounts. While this factor may not have a significant affect in any given month, it can cause scores to increase when accounts cross an age threshold that FICO finds significant.

4. Changes in the FICO Formula

FICO changes its formula periodically. FICO is continually trying to improve its formula to make it a more accurate indicator of credit risk. The same is true for non-FICO credit scoring formulas. The result is the multiple versions of the FICO formula are in use at any one time. When a new version is applied to your credit file, it can result in changes to your score.

5. Applying for New Credit

Applying for new credit could lower your credit score. We don’t know if they applied for new credit. But if she did, this could explain some of the drop in her credit score. Generally, however, inquiries are not a significant factor in the FICO formula.

6. Scorecard Hopping

Another explanation to changes in a credit score is that you may have been placed in a new scorecard. Called, scorecard hopping, this occurs when FICO places a consumer in a new scorecard. FICO doesn’t simply lump every consumer into the same pot and evaluate us all equally. They put us in what they call different scorecards.

FICO provides very little information about its scorecards. One scorecard that most believe exists, however, is for those who have a bankruptcy on their record. Scorecards enable FICO to evaluate the risk of similarly situated consumers. Your credit score depends in part on which scorecard you are in (and there’s no way to know which one

Now, scorecard hopping occurs when FICO moves a consumer from one scorecard to another. For example, if a bankruptcy is removed from a consumer’s credit file, they will be moved out of the bankruptcy scorecard into another scorecard. What’s interesting here is that even though you might get moved into a better scorecard, your credit score can actually move lower as a result of that change.

Why? Because you are now being compared to a different group of consumers. You may have done well when compared to others who have filed for bankruptcy. After the scorecard hop, however, you are now being compared to a very different group of consumers. Long term the switch should help, but in the short term it can lower your score.

7. Late Payments

This is the most critical causative factor for credit score fluctuations. Even one 30-day late payment can significantly affect your credit score. A late payment stays on your credit file for up to 7 years. Even if you’re doing everything else right, a single late payment can have a significant, negative impact on your credit score.

3 Tips for Monitoring Your Credit Score

1. Make sure to check your credit report

You can get your credit report for free at annualcreditreport.com. You’ll get your report from each of the three major credit bureaus for free once a year. Check it for errors. One reason your score can go down unexpectedly might be due to misinformation on your report. It happens all the time.

2. Use free services to understand what’s helping and hurting your score

The second thing you can do is use services that provide what are called educational scores. These scores are not calculated using the FICO formula, but by using a variety of other credit scoring formulas. These services do an excellent job of educating you about your credit score. You get pertinent information such as what’s hurting your score and what’s helping your credit score so you can figure out what’s going on and what you need to improve.

3. Monitor your FICO score

Especially if you get near to buying or refinancing a home, you may want to see your FICO score. You do that by going to myFICO. There are some costs involved but it’s not particularly expensive. They have a credit monitoring service you can continue to use on a monthly basis if you want.