What Causes Your Credit Score to Go Down?
Understand the core financial behaviors and reporting events that can significantly lower your credit score and impact your financial health.
A credit score is a numerical representation that helps lenders assess an individual’s creditworthiness. This three-digit number, typically ranging from 300 to 850, provides an instant snapshot of how reliably a person manages borrowed money. It plays a significant role in financial life, influencing approvals for loans, credit cards, and even rental applications. A higher score often leads to more favorable interest rates and terms on credit products. Understanding the factors that can cause a credit score to decrease is important for maintaining financial health.
Late Payments and Defaults
Payment history significantly influences a credit score, accounting for approximately 35% of a FICO Score and 40% to 41% of a VantageScore. A single late payment reported to credit bureaus can cause a score to drop, with the severity increasing based on how overdue the payment is. For instance, a payment that is 30 days late will have less impact than one that is 60 or 90 days late. Creditors typically report late payments in categories such as 30, 60, 90, 120, or 150 days past due.
If an account remains unpaid for an extended period, it may lead to a “charge-off,” where the lender writes off the debt as a loss. This occurs after a significant period of delinquency, often around 120 days or more, and further damages the credit score. A loan default, such as on an auto loan or mortgage, represents a failure to fulfill the obligations of the loan agreement. Both charge-offs and defaults are severe negative marks that remain on a credit report for up to seven years from the original delinquency date, considerably hindering future credit opportunities.
Credit Utilization and New Credit Applications
Credit utilization is the amount of revolving credit currently in use compared to the total available credit. This ratio is expressed as a percentage and is a key factor in credit scoring models, making up about 30% of a FICO Score. Lenders generally prefer a credit utilization ratio below 30%, meaning that if an individual has a total credit limit of $10,000, they should aim to keep their outstanding balances below $3,000. Maxing out credit cards or maintaining high balances can signal increased risk to lenders, even if payments are made on time, leading to a notable decrease in the credit score.
Applying for new credit causes a temporary dip in a credit score due to “hard inquiries,” which occur when a lender requests to review a credit report for an application. Each inquiry can lower a FICO Score by fewer than five points, with a larger impact for those with limited credit history. Hard inquiries remain on a credit report for two years but typically affect scores for about 12 months. Multiple inquiries in a short period, especially for different credit types, can signal higher risk and lead to a more significant score reduction. For loans like mortgages or auto loans, multiple inquiries within 14 to 45 days are counted as a single inquiry, allowing for rate shopping without excessive score impact.
Public Records and Collections
Public records and collection accounts represent some of the most severe negative entries on a credit report, leading to substantial credit score declines. Bankruptcies have a significant impact. A Chapter 7 bankruptcy can remain on a credit report for up to 10 years from the filing date, while a Chapter 13 bankruptcy stays for seven years. These events indicate significant financial distress and can make it challenging to obtain new credit for an extended period.
Foreclosures also severely damage credit scores and remain on a credit report for seven years from the date of the first missed payment that led to the foreclosure action. Like bankruptcies, foreclosures signal a failure to meet significant financial obligations. Accounts sent to collections, such as unpaid medical bills or utility bills, are another serious negative factor. A collection account can stay on a credit report for seven years from the date of the original delinquency that initiated the collection process. While their impact lessens over time, the presence of collection accounts indicates a history of unpaid debts and can significantly deter future lenders.
Other Influencing Factors
Closing older credit accounts can inadvertently lead to a decrease in a credit score. This action can shorten the average age of an individual’s credit accounts, which is a factor in credit scoring. Additionally, closing an account reduces the total available credit, which can increase the credit utilization ratio if existing balances remain. A higher utilization ratio, even with timely payments, can negatively impact the score.
Inaccuracies or fraudulent activity on a credit report can also lower a score. Incorrect late payments, accounts that do not belong to the individual, or inaccurate balances can appear on a report. These errors can misrepresent credit behavior and lead to an undeserved score reduction.
Co-signing a loan introduces shared financial responsibility, meaning the co-signer’s credit is tied to the primary borrower’s payment behavior. If the primary borrower makes late payments or defaults on the co-signed loan, this negative activity will appear on the co-signer’s credit report. Consequently, the co-signer’s credit score can decrease, reflecting the missed payments or default event.