How Does a Credit Score Go Down and Why?

A credit score serves as a numerical representation of an individual’s creditworthiness, which lenders utilize to assess the risk associated with extending credit. Understanding how these scores fluctuate is important for maintaining financial health. A decline in a credit score can often be attributed to specific behaviors or circumstances.

Negative Payment Behavior

Payment history holds the most significant influence on credit scoring models, making up approximately 35% of a FICO® Score. Even a single payment reported as 30 days late can lead to a credit score decrease, with the impact often more significant for individuals who previously had excellent credit. As payments become more delinquent—such as 60, 90, or 120 days past due—the severity of the score drop increases.

Defaulting on loans or credit accounts further damages a credit score. A default indicates a failure to fulfill the terms of a loan agreement, which can lead to severe and long-lasting negative marks on a credit report. For example, if an account goes unpaid for an extended period, it may be sent to collections, significantly impacting the score. Consistently making on-time payments across all credit obligations is crucial for maintaining a strong credit profile.

Credit Utilization and New Credit Applications

Credit utilization, defined as the amount of credit used relative to the total available credit, is a significant factor in credit scoring, accounting for about 30% of a FICO® Score. High utilization, typically exceeding 30% of available credit, can cause a credit score to decline because it suggests a higher risk to lenders. Maxing out credit cards is particularly detrimental, as it indicates a heavy reliance on credit and can lead to a quick drop in score. Maintaining a low credit utilization ratio demonstrates responsible credit management.

Applying for new credit often triggers a “hard inquiry” on a credit report, which can temporarily lower a credit score. A single hard inquiry typically causes a minimal drop, but multiple inquiries in a short timeframe can signal to lenders that an individual is seeking a significant amount of new credit. While these inquiries remain on a credit report for up to two years, their impact on a credit score usually diminishes after 12 months.

Closing an old, established credit account can also sometimes negatively impact a score. This action reduces the total available credit, which can inadvertently increase the credit utilization ratio if balances on other cards remain high. Additionally, closing an older account may shorten the average age of a consumer’s credit accounts, influencing the overall length of credit history.

Major Derogatory Marks

Severe financial events can result in major derogatory marks on a credit report, leading to substantial and prolonged credit score reductions. Bankruptcy, for instance, is among the most damaging events, capable of lowering a credit score by a significant number of points. A Chapter 7 bankruptcy typically remains on a credit report for 10 years, while a Chapter 13 bankruptcy remains for seven years. These events signify a high level of financial distress, making future credit acquisition more challenging.

Foreclosures, which occur when a mortgage lender repossesses a property due to missed payments, also severely impact credit scores. A foreclosure can lead to a drop of 100 points or more and remains on a credit report for seven years. Similarly, repossessions of other secured assets, such as vehicles, can cause significant credit damage. These actions indicate a default on a secured loan and can result in a score drop, remaining on the report for up to seven years.

Accounts sent to collections or charged-off by the original creditor represent another severe derogatory mark. When a debt is sent to collections, it indicates a significant delinquency, and this information can negatively affect credit scores. A charge-off occurs when a creditor writes off a debt as a loss due to severe delinquency. These marks signal considerable risk to potential lenders and remain on credit reports for up to seven years.

Errors and Fraud

Inaccuracies or mistakes present on a credit report can lead to an unwarranted decline in a credit score. This can include incorrect late payments, accounts that do not belong to the individual, or misidentified personal information. For example, a credit report might mistakenly show a payment as 30 days late when it was paid on time, or an account might be duplicated, artificially inflating an individual’s debt. Such errors can misrepresent an individual’s financial behavior and negatively influence credit scoring models.

Identity theft presents another significant external factor that can severely damage a credit score without the consumer’s direct action. Thieves can use stolen personal information to open new credit accounts or make unauthorized charges on existing accounts. When these fraudulent accounts or charges go unpaid, they appear as delinquencies or high utilization on the victim’s credit report, leading to a substantial score drop.

These situations underscore the importance of regularly reviewing credit reports. Identifying and addressing these discrepancies promptly is crucial for maintaining an accurate representation of one’s creditworthiness.