Is It Bad If Your Credit Score Goes Down?

A credit score is a three-digit number, typically ranging from 300 to 850, that represents an individual’s creditworthiness. It indicates the likelihood of repaying borrowed funds on time and is primarily derived from credit reports. Lenders use credit scores to assess financial risk, influencing the terms and availability of credit products.

What Causes a Credit Score to Decrease?

A credit score can decrease for several reasons. One of the most impactful factors is making late payments or missing them entirely. Payments reported as 30 days or more past due can significantly lower a score. These late marks can remain on a credit report for up to seven years from the original delinquency date, though their impact lessens over time.

Increasing credit utilization, the percentage of available credit being used, is another common reason for a score drop. Maintaining a high balance relative to your credit limit, especially above 30%, signals increased risk and negatively affects your score. For example, a $5,000 balance on a $10,000 limit is 50% utilization, which is generally seen as too high. Closing old credit accounts can also unintentionally lower a score by reducing total available credit and shortening the average age of your credit history.

Applying for new credit too frequently can cause a slight, temporary dip in your score due to hard inquiries. A hard inquiry occurs when a lender checks your credit report after you apply for a loan or credit card. While a single inquiry usually has a minor impact, multiple inquiries in a short period can suggest higher risk to lenders. These inquiries can stay on your credit report for up to two years, though most scoring models only consider them for the first 12 months.

Severe negative events like accounts sent to collections, foreclosures, or bankruptcies have a substantial and prolonged negative effect on a credit score. Collection accounts and foreclosures typically remain on your report for seven years. Bankruptcies can stay on your credit report for up to 10 years. Errors on your credit report, due to mistakes by creditors or identity theft, can also cause an unexpected score decrease.

Consequences of a Lower Credit Score

A lower credit score can create significant challenges across personal finance, making it more difficult and expensive to access essential services and products. One direct impact is on loan approvals and interest rates. Lenders view lower scores as indicative of higher risk, which can lead to denial for mortgages, auto loans, or personal loans. If approved, individuals with lower scores typically face substantially higher interest rates, adding thousands of dollars to the total loan cost.

Access to credit cards is also affected by a decreased credit score. Obtaining new credit cards becomes more challenging, and existing credit limits may be reduced or new applications denied. This can restrict financial flexibility.

Landlords frequently check credit scores as part of tenant screening. A lower score might result in a rental application denial or require a larger security deposit, sometimes equivalent to several months’ rent. Many insurance providers use credit-based insurance scores to determine policy premiums for auto and home insurance. A lower credit-based insurance score can lead to higher premiums, as it is statistically correlated with an increased likelihood of filing claims.

Utility companies, such as those providing electricity or internet services, may also conduct credit checks. A low credit score could necessitate a higher security deposit, often ranging from $100 to $500, before services are activated. Some employers, particularly for positions involving financial responsibilities, conduct credit checks on job applicants. A poor credit history could hinder employment opportunities in certain fields.

Understanding and Improving Your Credit Score

Understanding your credit report is the first step toward improving a lower credit score. Consumers are entitled to a free copy annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion, via AnnualCreditReport.com. Review these reports for accuracy and dispute any errors found. Many credit card companies and banks also offer free access to credit scores for ongoing monitoring.

The most impactful strategy for improvement is consistently paying bills on time. Payment history is a primary factor in credit scoring models. Setting up automatic payments or reminders can help ensure timely remittances. Reducing credit utilization is another crucial step; aim to keep balances on revolving credit, like credit cards, below 30% of the available credit limit. Paying down credit card debt is an effective way to lower this ratio.

Avoiding unnecessary new credit applications is advisable, as each hard inquiry can cause a small, temporary score reduction. Numerous inquiries in a short period can signal higher risk. Keeping old, positive credit accounts open, even if rarely used, contributes to a longer credit history.

Addressing any collection accounts or past-due debts is important. Resolving them can demonstrate a commitment to financial responsibility. Establishing a mix of credit, such as both installment loans and revolving credit, can also positively influence your score. However, acquiring new debt solely to improve credit mix is not recommended.