What Can Cause Your Credit Score to Drop?

A credit score serves as a numerical representation of an individual’s creditworthiness. Lenders, landlords, and even some insurance providers utilize this three-digit number to assess risk. A higher score generally indicates a lower risk, which can lead to more favorable terms for loans, housing applications, and insurance premiums.

Late or Missed Payments

Payment history is a primary determinant of a credit score, and late or missed payments can significantly diminish it. Creditors typically report payments as late once they are 30 days or more past due. The severity of the impact increases with the length of the delinquency, meaning a 90-day late payment affects a score more negatively than a 30-day late payment.

Consecutive missed payments further compound the negative effect. Each month an account remains past due, a new late payment notation can be added to the credit report. These negative marks typically remain on a credit report for seven years from the date of the original delinquency.

If an account continues unpaid, it may eventually be sent to collections or charged off by the original creditor. A charge-off occurs when a creditor deems the debt uncollectible and writes it off as a loss, usually after 120 to 180 days of non-payment. Both collection accounts and charge-offs are severe negative entries, often staying on a credit report for seven years from the date of the first missed payment that led to the action. These entries signal a significant financial risk to potential lenders, making it more challenging to obtain new credit.

Credit Usage and New Debt

The amount of credit an individual uses relative to their total available credit, known as credit utilization, plays a substantial role in credit scoring. A high credit utilization ratio can signal increased financial risk to lenders. Financial experts often recommend keeping this ratio below 30% to maintain a healthy credit score.

Acquiring new debt can also temporarily lower a credit score, primarily due to hard inquiries. When an individual applies for new credit, a hard inquiry is typically made on their credit report. While a single hard inquiry usually results in a minor, temporary dip, multiple inquiries in a short period can have a compounding effect, signaling a greater reliance on new credit. These inquiries generally remain on a credit report for two years, though their impact on the score typically lessens after 12 months.

Closing old credit accounts can also negatively affect a credit score. This action reduces the total available credit, which can inadvertently increase the credit utilization ratio if existing balances remain. Closing older accounts can shorten the average age of an individual’s credit history, a factor that contributes to credit score calculations. A longer credit history generally demonstrates more experience managing credit, which is viewed favorably by scoring models.

Major Financial Events

Certain severe financial events can have a profound and long-lasting negative impact on an individual’s credit score. Bankruptcy is a legal process that can provide debt relief but comes with significant credit consequences. A Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, typically remains on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, which involves a repayment plan, generally stays on a credit report for seven years. The presence of bankruptcy on a credit report is a strong indicator of financial distress and can make obtaining new credit very difficult.

Foreclosure occurs when a lender repossesses a property due to missed mortgage payments. This event is a significant negative mark and generally stays on a credit report for seven years from the date of the first missed payment that led to the foreclosure. The impact on a credit score can be substantial, often leading to a drop of many points. Similarly, repossession of an asset, such as a vehicle, due to unpaid loans also severely damages credit. A repossession typically remains on a credit report for seven years from the date of the first missed payment.

Credit Report Errors

Not all credit score reductions stem from an individual’s financial behaviors; sometimes, errors on a credit report can be the cause. Inaccuracies in reporting by creditors or credit bureaus can negatively affect a score without the individual’s fault. These reporting mistakes might include incorrect late payments, wrong account balances, or even duplicate accounts. Such errors can misrepresent an individual’s payment history or credit utilization, leading to an unwarranted score drop.

Identity theft represents another serious external factor that can damage a credit score. If a fraudulent account is opened in someone’s name or existing accounts are misused, these unauthorized activities can appear on the victim’s credit report. This can lead to unexpected debt, missed payments, and other negative entries that are not the individual’s responsibility. The presence of these fraudulent entries can significantly lower a credit score.