What Can Make Your Credit Score Drop 100 Points?

A credit score is a numerical representation of creditworthiness. This three-digit number influences access to loans, mortgages, and credit cards. Credit scores are dynamic and fluctuate based on financial behavior and credit events. Understanding factors that can lead to a score drop is important for financial health.

Major Derogatory Marks

Negative financial events can lead to substantial, long-lasting reductions in a credit score. These derogatory marks signal financial distress to lenders.

Bankruptcy indicates an inability to repay debts and can remain on a credit report for 7 to 10 years, depending on the type filed. A Chapter 7 bankruptcy, involving asset liquidation, stays on a report for 10 years. A Chapter 13 bankruptcy, involving a repayment plan, remains for 7 years. The impact of bankruptcy is severe, often leading to a substantial score drop.

Foreclosure, resulting from defaulting on a mortgage, carries a heavy penalty. This mark stays on a credit report for 7 years from the first missed payment date that led to foreclosure. It can cause a significant credit score reduction, potentially by as much as 300 points for those with high initial scores. Repossession, where a lender seizes an asset like a car due to unpaid debt, remains on a credit report for 7 years from the original delinquency date. Both voluntary and involuntary repossessions negatively impact credit.

Debt settlement and charge-offs reflect unfavorably on a credit report. A charge-off occurs when a creditor writes off a debt as a loss, usually after 120 to 180 days of missed payments. It remains on the report for 7 years from the first missed payment date. While debt settlement means paying a reduced amount, the associated missed payments and “settled” status can stay on the report for 7 years, indicating original terms were not met. Public records, such as tax liens and civil judgments, historically appeared on credit reports and impacted scores, remaining for 7 years or longer. However, as of April 2018, the three major credit bureaus removed tax liens and civil judgments from credit reports. They no longer directly impact credit scores through those reports. Nevertheless, lenders can still find these public records, which may influence credit decisions.

Credit Utilization and Payment History

Day-to-day credit management influences a credit score, with credit utilization and payment history being impactful factors. High credit utilization, the percentage of available credit used, can signal increased risk to lenders and lead to a score drop. Financial experts advise keeping credit utilization below 30% of total available credit across all revolving accounts. Exceeding this threshold, for example, using $2,700 out of a $5,000 credit limit, results in a 54% utilization rate. This can negatively affect the score.

Payment history is a critical component, carrying the most weight in credit scoring models. It often accounts for approximately 35% of a FICO Score. A single late payment, especially if 30, 60, or 90 days past due, can severely damage a credit score. Creditors report payments as late to credit bureaus once they are at least 30 days beyond the due date. A 30-day late payment can cause a score to drop by 100 points or more, particularly for individuals with excellent credit.

The impact of a late payment becomes more severe the longer it remains unpaid. A 60-day late payment is worse than a 30-day one, and a 90-day late payment has an even greater negative effect. While a late payment can stay on a credit report for 7 years from the original delinquency date, its negative impact on the score diminishes over time. Consistent on-time payments following a delinquency can help mitigate long-term damage.

New Credit and Account Activity

Applying for and managing new or existing credit accounts can cause credit scores to fluctuate, even when actions are taken responsibly. Hard inquiries occur when a lender checks an individual’s credit report after they apply for new credit, such as a loan or credit card. Each hard inquiry can cause a small, temporary dip in the credit score, usually by fewer than five points. While hard inquiries remain on a credit report for up to two years, their impact on FICO scores is considered for only the most recent 12 months. Multiple hard inquiries within a short period, especially outside of specific rate-shopping windows for mortgages or auto loans, can signal higher risk to lenders and lead to a more pronounced score impact.

Opening new credit accounts, such as a credit card or loan, can initially lead to a temporary score drop. This is because new accounts lower the average age of all credit accounts in an individual’s credit history. A longer credit history is viewed more favorably by credit scoring models. While opening new credit can be beneficial for credit mix and utilization in the long run, the immediate effect is often a slight score decrease.

Conversely, closing older, established credit accounts can negatively affect a credit score. Closing an old account reduces total available credit, which can inadvertently increase the credit utilization ratio on remaining accounts if balances are carried. It also shortens the average age of accounts, impacting the length of credit history, a factor that contributes to credit scores. This action can make an individual appear to have a less established credit profile.

Errors and Fraud

Credit scores can be negatively impacted by external factors not directly related to an individual’s financial management. Identity theft and fraudulent accounts threaten a credit score. When identity thieves open new credit accounts in someone else’s name or misuse existing accounts, resulting negative marks, such as missed payments or high balances, appear on the victim’s credit report. These unauthorized activities can substantially lower a score, despite the individual having no direct involvement.

Credit report errors, even if unintentional, can lead to a lower score. Inaccuracies might include incorrect account balances, payments reported late when on time, or accounts that do not belong to the individual. Outdated information that should have been removed, such as a bankruptcy exceeding its reporting period, can erroneously depress a score. These inaccuracies can misrepresent an individual’s credit behavior and financial standing, leading to an unfair score reduction.