What Habits Lower Your Credit Score the Most?

A credit score serves as a numerical representation of an individual’s financial reliability, providing lenders with a quick assessment of their likelihood to repay borrowed funds. This three-digit number influences various aspects of personal finance, from securing loans and mortgages to determining interest rates and even impacting rental applications or insurance premiums. Credit scores are not static; they fluctuate based on an individual’s financial behaviors, reflecting how consistently and responsibly they manage their financial obligations over time. Understanding the factors that shape this score allows individuals to make informed decisions that support their financial well-being.

Paying Bills Late

Missing payment deadlines on financial obligations can significantly diminish a credit score. When a payment on an account, such as a credit card, auto loan, or mortgage, goes unpaid for a specific period, the creditor reports this delinquency to the major credit bureaus. A payment is considered late for credit reporting purposes once it is 30 days past its due date.

The negative impact on a credit score intensifies with the duration of the delinquency. A payment that is 60 or 90 days past due will cause a more severe reduction in score than one that is only 30 days late. A pattern of repeated late payments across multiple accounts or over an extended period signals increased risk to lenders. These late payment notations can remain on a credit report for up to seven years from the date of the delinquency.

Consistent failure to make payments can lead to more severe credit issues beyond simple late marks. Accounts that remain unpaid for extended periods may be charged off by the creditor, meaning the debt is deemed uncollectible and sold to a collection agency. Both charge-offs and collection accounts are negative entries on a credit report. These delinquencies can lower a credit score and make it challenging to obtain new credit.

Carrying High Credit Card Balances

The amount of revolving credit an individual uses compared to their total available credit, known as the credit utilization ratio, influences a credit score. This ratio is calculated by dividing the total outstanding balances on all revolving accounts by the sum of their credit limits. Maintaining a high credit utilization ratio signals to lenders that an individual may be over-reliant on credit or struggling financially, which can negatively impact their score.

A credit utilization ratio consistently above 30% is less favorable to credit scoring models. For instance, if an individual has a credit card with a $10,000 limit and carries a balance of $7,000, their utilization for that card is 70%, which is considered high. Even if payments are made on time, a high utilization ratio can still depress a credit score.

This factor is relevant for revolving credit accounts, such as credit cards and lines of credit, where balances fluctuate regularly. Credit bureaus receive updates on account balances from creditors once a month. If a high balance is reported before a payment is made, that high balance will temporarily impact the credit score until the next reporting cycle reflects a lower balance. Consistently utilizing a large portion of available credit from month to month, rather than paying down balances, establishes a habit that keeps credit utilization elevated.

Applying for New Credit Frequently

Each time an individual applies for new credit, such as a new credit card, a car loan, or a mortgage, a “hard inquiry” is generated on their credit report. This occurs when a potential lender requests to view the individual’s credit file to assess their creditworthiness. While a single hard inquiry has a minor and temporary impact on a credit score, a pattern of numerous hard inquiries within a short period can signal increased risk.

Multiple hard inquiries in a brief timeframe can suggest to lenders that an individual is either experiencing financial distress and seeking credit to cover expenses, or that they are preparing to take on a significant amount of new debt. This behavior can be interpreted as a higher lending risk, leading to a more noticeable reduction in the credit score. Each hard inquiry can remain on a credit report for up to two years, though their impact on the score diminishes after about 12 months.

Opening several new accounts in a short period can negatively affect the “average age of accounts” component of a credit score. Credit scoring models favor a longer credit history with established accounts. When numerous new accounts are opened, the overall average age of their credit history decreases. This reduction in the average age can be interpreted as less financial stability or experience, which can contribute to a lower credit score.

Closing Established Accounts

Closing an old, established credit account can inadvertently lead to a reduction in a credit score, even if the account was well-managed. One primary reason for this negative impact relates to the credit utilization ratio. When an account is closed, its credit limit is removed from the total available credit. If an individual maintains balances on other open credit accounts, their overall credit utilization ratio will immediately increase because the same outstanding balance is now spread across a smaller total credit limit.

For example, if an individual has two credit cards, each with a $5,000 limit and a $1,000 balance, their total available credit is $10,000 and their total balance is $2,000, resulting in a 20% utilization. If one card is closed, the total available credit drops to $5,000, while the total balance remains $2,000, pushing the utilization to 40%. This sudden increase in utilization can cause a score to drop.

Another factor affected by closing old accounts is the “length of credit history,” which is a component of credit scoring models. These models reward individuals with a longer history of responsible credit management. When an old account is closed, it can reduce the average age of all open accounts. A shorter average age of accounts can be viewed less favorably by scoring models, contributing to a lower credit score over time.