What Causes Your Credit Score to Go Down?

A credit score is a numerical representation of an individual’s financial reliability, used by lenders to assess risk. This three-digit number fluctuates based on financial behaviors and external factors. Understanding what can decrease this score is important for financial health. This article explores common reasons why a credit score might go down.

Payment History Issues

Payment history is a primary determinant of credit scores. Late payments are reported to credit bureaus and recorded on a credit report. The impact increases with the duration of lateness, such as 30, 60, or 90-plus days past due. Even a single payment reported 30 days late can cause a notable drop, potentially 50 to over 100 points, especially for those with excellent credit history.

Missed payments can lead to default if an account remains unpaid. A payment 30 days or more past due is reported to credit bureaus and can remain on a credit report for up to seven years from the initial delinquency date. As delinquency extends, the negative effects on the credit score become more pronounced. For instance, a 90-day late payment causes a more significant score reduction than a 30-day late payment.

Severely delinquent accounts may be sent to a collection agency or “charged off” by the original creditor. A charge-off occurs when a creditor writes off the debt as a loss. Both collections and charge-offs are severe negative marks on a credit report, signaling high risk to lenders. They remain on the report for up to seven years from the original delinquency date. Prolonged payment failures can escalate to bankruptcy, which carries the most severe consequences for a credit score.

Credit Utilization and Account Management

The amount of credit used compared to the total available credit, known as credit utilization, plays a significant role in credit scoring. This ratio is calculated by dividing total outstanding balances on revolving credit accounts by the total available credit limit. For example, if an individual has $3,000 in balances and a combined credit limit of $10,000, their credit utilization ratio would be 30%.

A high credit utilization ratio signals increased risk to lenders, suggesting greater reliance on borrowed funds. Credit scoring models recommend keeping this ratio below 30% to avoid negative impacts, with lower percentages correlating with higher scores. Maxing out credit cards, or using a significant portion of available credit, can lead to an immediate and substantial drop in a credit score. This behavior indicates potential financial distress.

Closing an older credit account can inadvertently increase credit utilization. Closing an account reduces total available credit, causing existing balances to represent a larger percentage of the remaining credit. Additionally, closing older accounts can shorten the average age of a credit file, a factor credit scoring models consider indicative of a stable credit history. Similarly, a lender might reduce a credit limit due to economic conditions or perceived risk. This reduction automatically increases the credit utilization ratio, leading to an unexpected decrease in the credit score.

New Credit and Credit Inquiries

Applying for new credit can temporarily impact a credit score due to credit inquiries. When a consumer applies for a loan or credit card, lenders perform a “hard inquiry” on their credit report to assess creditworthiness. This inquiry is recorded and can cause a small, temporary dip, usually fewer than five points. While a hard inquiry remains for up to two years, its impact diminishes after 12 months.

Multiple hard inquiries within a short period, especially for different credit types, can be viewed as a higher risk indicator by credit scoring models. This may suggest an urgent need for credit or taking on too much debt, potentially leading to a noticeable score drop. However, for loans like mortgages or auto loans, multiple inquiries made within a short shopping period (14 to 45 days) are treated as a single inquiry to allow for rate shopping.

Opening several new credit accounts simultaneously can contribute to a score decrease. New accounts can lower the average age of an individual’s credit history, a factor in credit scoring models. A shorter average age of accounts may indicate a less established credit profile, signaling higher risk to lenders. Taking on multiple new credit obligations simultaneously can also increase the overall debt burden, negatively impacting the credit score.

Public Records and Derogatory Marks

Major negative financial events that become part of public records can severely damage credit scores. Filing for bankruptcy is among the most damaging events for a credit score, indicating an inability to manage debt. The type of bankruptcy determines how long it remains on a credit report; a Chapter 7 bankruptcy stays for 10 years from filing, while a Chapter 13 remains for seven years. These entries profoundly impact an individual’s ability to obtain credit for years after filing.

Foreclosures and repossessions are serious derogatory marks, reflecting a failure to repay secured debts like a home mortgage or an auto loan. These events indicate a financial setback and can remain on a credit report for about seven years from the date of the first missed payment. Such records signal high risk to lenders, making it difficult to secure new credit or favorable interest rates.

Historically, civil judgments and tax liens were significant derogatory marks on credit reports. However, due to changes by major credit bureaus around 2017-2018, these public records are generally no longer included on standard credit reports unless they include sufficient identifying information. While this change means they may not directly impact a credit score as they once did, these records are still publicly accessible and can influence credit decisions.

Errors and Fraud

A credit score can decrease due to inaccurate information or fraudulent activity, not just an individual’s financial actions. Inaccurate information on a credit report, such as incorrect late payments, wrong account balances, or accounts that do not belong to the individual, can unfairly lower a credit score. These errors can arise from data entry mistakes by creditors or credit bureaus, misrepresenting creditworthiness and making it harder to obtain credit at favorable terms.

Identity theft can severely impact a credit score. When fraudsters open new credit accounts or make unauthorized charges, these activities lead to new, negative entries on the victim’s credit report. This fraudulent activity can cause a sharp decline in the credit score through increased debt, new hard inquiries, and delinquencies on accounts the victim is unaware of. Unauthorized accounts and charges can appear as legitimate debts, negatively influencing payment history and credit utilization.

Regularly monitoring credit reports is important due to potential errors and fraudulent activity. Individuals can obtain free copies of their credit reports from each of the three major credit bureaus annually. Reviewing these reports allows for timely identification of inaccuracies or suspicious activity. Promptly disputing errors with credit bureaus and reporting identity theft to relevant authorities are important steps to mitigate damage and protect a credit score.