What Causes a Credit Score to Drop?
Understand the specific actions and underlying mechanisms that cause your credit score to decrease, and how long these impacts last.
Understand the specific actions and underlying mechanisms that cause your credit score to decrease, and how long these impacts last.
A credit score is a three-digit number (300-850) that assesses an individual’s creditworthiness. It helps lenders determine the likelihood of timely loan repayment. Credit scores significantly influence decisions for mortgages, credit cards, auto loans, and other credit products, affecting both approval and interest rates. These scores are dynamic, fluctuating based on financial behavior and reported information.
Missing payments can significantly lower a credit score. Creditors typically report payments as late once they are 30 days past due, though some, like federal student loans, allow up to 90 days. The longer a payment is delayed (30, 60, or 90+ days), the more severe the negative effect. Even a single late payment can cause a notable drop, especially for individuals with a strong credit history.
High credit utilization also contributes to a lower score. This refers to the amount of revolving credit used compared to the total available credit. Maintaining high balances indicates a higher reliance on borrowed funds, which lenders view as an increased risk. Experts suggest keeping credit utilization below 30% to avoid negatively affecting scores.
Applying for new credit can result in a temporary dip in scores due to hard inquiries. A hard inquiry occurs when a lender checks a credit report after a credit application, such as for a new credit card, mortgage, or auto loan. While a single inquiry usually has a minor impact (typically reducing a score by less than five points), multiple hard inquiries in a short period can suggest higher risk. However, scoring models often treat multiple inquiries for the same loan type (e.g., mortgage or auto loan) within a short window (14-45 days) as a single inquiry for rate shopping.
Public records and accounts sent to collections severely damage credit scores. Events like bankruptcies, foreclosures, and civil judgments indicate significant financial distress and a failure to meet obligations. When an account becomes severely delinquent (often after 120-180 days), creditors may charge off the debt or send it to a collection agency. These negative marks signal high risk to potential lenders.
Closing older, positive accounts, especially credit cards, can inadvertently lower a credit score. This reduces overall available credit, which can increase the credit utilization ratio if other balances remain. It also shortens the average length of credit history, a factor that positively influences scores. Maintaining older accounts in good standing generally benefits a credit profile.
Defaulting on loans, including auto, mortgage, or student loans, has a severe and lasting impact on a credit score. A loan default means failing to make payments as agreed, often after extended delinquency. This indicates a significant inability or unwillingness to repay debt, leading to substantial score reductions and making it challenging to secure future credit.
Credit scoring models, such as FICO and VantageScore, analyze various factors to assess credit risk. These models assign different weights to each category, with some carrying more influence. Understanding these components clarifies how negative events translate into score reductions.
Payment history is the most significant factor in most credit scoring models, typically accounting for about 35% of a FICO Score. A single missed payment, particularly if 30 or more days late, can cause a substantial drop. The impact is more pronounced for individuals who previously maintained excellent credit. Continuous on-time payments are paramount for a healthy credit profile.
Amounts owed, or credit utilization, is another heavily weighted factor, usually comprising around 30% of a FICO Score. This component measures the proportion of available credit used. High utilization, such as using 70% or more of available credit, suggests a higher risk of financial strain to lenders. Reducing outstanding balances and keeping credit card usage low can positively influence this score aspect.
The length of credit history considers how long accounts have been open and active. This factor typically accounts for approximately 15% of a FICO Score. A longer history of responsible credit management generally indicates greater financial stability.
New credit inquiries and recently opened accounts represent about 10% of a FICO Score. Numerous applications in a short period can temporarily lower a score. Lenders may interpret a sudden surge in credit-seeking behavior as an increased risk or a sign of financial difficulty.
Credit mix, accounting for roughly 10% of a FICO Score, evaluates the variety of credit types an individual manages. This includes a blend of revolving credit (like credit cards) and installment loans (such as mortgages or auto loans). Demonstrating the ability to handle different forms of credit responsibly can be seen favorably, though this factor generally has a smaller impact compared to payment history or amounts owed. A lack of diverse credit or a sudden shift in credit types might be viewed less positively by scoring models.
The severity and recency of negative events also play a role in their impact on a credit score. More severe events, such as bankruptcies or foreclosures, cause a larger score drop than a single late payment. Recent negative events have a greater impact than older ones. As time passes and positive credit behaviors are demonstrated, the influence of past negative information diminishes, even while the entry remains on the credit report.
Negative information does not remain on a credit report indefinitely, but its presence can affect a credit score for a significant period. The Fair Credit Reporting Act (FCRA) sets guidelines for how long most derogatory marks can appear.
Late payments typically remain on a credit report for seven years from the date of the original delinquency. This period starts from the first missed payment that led to the late status, even if the account is later brought current.
Collection accounts generally stay on a credit report for seven years and 180 days from the date of the original delinquency that initiated the collection process. This timeline applies whether the account is paid or unpaid.
Bankruptcies have varying timelines depending on the type filed. A Chapter 7 bankruptcy, involving asset liquidation, can remain on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, involving a repayment plan, typically remains for seven years from the filing date.
Foreclosures are reported for seven years from the date of the first missed payment that led to the foreclosure. After this period, the foreclosure should automatically be removed from the credit report.
Hard inquiries, which result from applying for new credit, usually remain on a credit report for up to two years. However, their impact on a credit score usually lessens or disappears after about 12 months.
Charged-off accounts, where a creditor has written off a debt as a loss, typically stay on a credit report for seven years from the date of the original delinquency. This period begins from the first missed payment that led to the charge-off, not the date the account was charged off.