What Causes Your Credit Score to Go Down?

A credit score represents an individual’s creditworthiness. Lenders use this three-digit number to assess risk when extending credit, influencing decisions on loans, credit cards, and rental applications. Understanding factors that cause this score to decline is important for financial health.

Late or Missed Payments

Payment history holds significant weight in credit scoring models. Failing to make payments on time can severely impact your score, leading to a notable decline. Even a single payment reported 30 days past its due date can have a negative effect.

The severity of the impact increases with the length of the delinquency. Payments that are 60 or 90 days late will cause a more substantial score drop than those only 30 days overdue. Should an account remain unpaid, it may eventually be charged off by the original lender and sent to a collection agency.

High Credit Balances and New Accounts

The amount of credit you use relative to your total available credit, known as your credit utilization ratio, significantly influences your credit score. A high utilization ratio suggests a greater reliance on borrowed funds, which lenders may view as an increased risk. Keeping this ratio below 30% is recommended to avoid negatively impacting your score. Exceeding this threshold, or maxing out credit card limits, can lead to a credit score reduction.

Applying for new credit results in “hard inquiries.” A hard inquiry occurs when a lender checks your credit report as part of a credit application. Each hard inquiry can temporarily lower your score by a few points and remains on your credit report for up to two years, though its impact on the score diminishes after 12 months. Opening multiple new accounts in a short period can signal increased risk to lenders and reduce the average age of your credit accounts.

Public Records and Collection Accounts

Severe financial events, often public records, can reduce a credit score, indicating financial distress. Bankruptcy filings are among the most damaging events. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years from the filing date, while a Chapter 13 bankruptcy stays for seven years. These events signal an inability to manage debt.

Foreclosures and repossessions, resulting from defaulting on secured loans, also damage credit scores. A foreclosure entry stays on your credit report for seven years from the date of the first missed payment. Accounts sent to collections or charged off indicate serious delinquency and remain on reports for seven years from the original delinquency date. While tax liens no longer appear on credit reports, they are public records and can affect a lender’s perception of risk.

Inaccuracies on Your Credit Report

Not every drop in a credit score is a direct result of a consumer’s actions; errors or fraudulent activity can also be contributing factors. Common inaccuracies found on credit reports include incorrect late payments, accounts that do not belong to the individual, or inaccurate account balances. Such errors can misrepresent an individual’s credit behavior or actual debt levels, leading to an unfair decrease in their credit score.

Identity theft can cause a score to plummet. When fraudulent accounts are opened or unauthorized activity occurs, negative entries appear on the victim’s credit report. These fraudulent items can falsely indicate high debt or missed payments, severely impacting the score. Regularly checking credit reports from all three major bureaus is important to identify and address any such inaccuracies, which can then be disputed to mitigate their negative impact.