How Come My Credit Score Went Down?
Explore the key financial behaviors and reporting factors that commonly lead to a decrease in your credit score.
A credit score serves as a numerical representation of an individual’s creditworthiness. This three-digit number, typically ranging from 300 to 850, is derived from the information contained within a person’s credit report. Credit scores are not fixed values; they are dynamic and can fluctuate regularly based on various financial activities and reporting changes. Lenders and creditors rely on these scores to assess risk when making decisions about loan approvals, interest rates, and other credit terms.
Changes in Payment Behavior
Payment history holds significant weight in credit scoring models. A single late payment can lead to a noticeable decrease in a credit score. The severity of this impact generally increases with the degree of lateness and the number of occurrences. Creditors typically report payments as late only after they are 30 days or more past due.
If a payment remains unpaid for longer periods, such as 60 or 90 days, the negative effect on the credit score becomes more pronounced. These extended delinquencies can lead to further damage and may result in the account being sent to collections. While a late payment can remain on a credit report for up to seven years from the original delinquency date, its negative influence on the score tends to diminish over time as more positive payment history is established. Consistently making payments on time is important for maintaining a healthy credit score.
Credit Utilization and New Accounts
The amount of credit used relative to the total available credit, known as credit utilization, significantly impacts credit scores. A high utilization ratio, above 30%, is viewed negatively by scoring models and can cause a score to drop. This ratio signals to lenders that an individual might be over-reliant on credit or potentially in financial distress. Reducing outstanding balances and keeping utilization low can positively influence a credit score.
New applications for credit also play a role, as each application typically results in a “hard inquiry” on a credit report. A hard inquiry occurs when a lender checks your credit history during a credit application process, such as for a new loan or credit card. While a single hard inquiry usually causes only a minimal and temporary drop of a few points, multiple inquiries within a short timeframe can have a compounding effect and suggest increased risk to lenders. These inquiries generally remain on a credit report for up to two years, though their impact on the score typically lessens after 12 months.
Closing an old credit account can also inadvertently lower a credit score. This action may shorten the average age of a person’s credit accounts, a factor that contributes to score calculation. Furthermore, closing an account reduces the total available credit, which can increase the credit utilization ratio on remaining open accounts, thereby negatively affecting the score. Financial experts often advise against closing older accounts, even if unused, to preserve a longer credit history and a favorable utilization ratio.
Major Negative Financial Events
Certain financial events can lead to a long-lasting decrease in a credit score. Events such as bankruptcies, foreclosures, repossessions, collection accounts, and charge-offs are considered detrimental. When these occurrences are reported to credit bureaus, they indicate a significant inability to manage financial obligations. These events often result in a significant drop in credit scores.
These derogatory marks remain on a credit report for an extended period, typically seven to ten years, depending on the specific event. Although less common than minor late payments, the presence of such major negative events signals a high level of credit risk to potential lenders. While accurate negative information cannot be removed from a credit report before its designated time, its influence on the score gradually diminishes over the years.
Credit Report Errors
Sometimes, a credit score decline may not stem from an individual’s actions but from inaccuracies on their credit report. Common errors can include incorrect personal information, accounts that do not belong to the consumer, or erroneous reporting of late payments when they were made on time. Identity theft can also result in unauthorized accounts or fraudulent activity appearing on a credit report, which can severely damage a score. It is important to regularly review credit reports for such discrepancies.
Consumers are entitled to a free copy of their credit report weekly from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through AnnualCreditReport.com. Upon identifying an error, individuals can dispute the inaccurate information directly with the credit bureau. The dispute process typically involves contacting the bureau with supporting documentation. Both the credit bureau and the entity that provided the incorrect information are responsible for correcting errors, usually within a 30-day investigation period.