What Major Factors Can Ruin Your Credit Score?

A credit score is a three-digit number, typically ranging from 300 to 850, representing an individual’s likelihood of repaying debts. These scores are crucial in financial life, influencing loan approvals, interest rates, and even access to housing or employment. Lenders use credit scores to assess risk, with higher scores indicating lower risk and more favorable credit terms.

Late or Missed Payments

Timely payments are essential for maintaining a healthy credit score. Even a single payment 30 days past due can negatively impact a score, with severity increasing for longer delinquencies like 60 or 90 days. Missed payments on credit cards, auto loans, mortgages, and utility bills can be reported to credit bureaus.

Accounts severely delinquent (120-180 days) may be sent to collections or charged off. A collection account signifies a debt transferred to a debt collector. A charged-off account means the creditor has written off the debt as uncollectible, though the individual remains responsible. Both collection and charged-off accounts are severe negative marks, signaling default, and can remain on a credit report for up to seven years from the original delinquency date.

High Credit Utilization

Credit utilization measures the amount of revolving credit used compared to the total available credit, primarily for accounts like credit cards. A high utilization ratio can significantly harm a credit score, even with timely payments. Lenders view ratios above 30% as increased risk.

For example, a $4,000 balance on a $10,000 credit limit results in 40% utilization, signaling potential over-reliance on credit or financial strain. This perception of risk can reduce credit scores. Even with a perfect payment history, consistently high utilization can prevent score improvement or cause decline.

New Credit Applications and Account Closures

Applying for new credit results in “hard inquiries” when lenders check a credit report for applications like credit cards or loans. Each hard inquiry causes a small, temporary dip in a credit score, typically fewer than ten points. While a single inquiry has minimal effect, multiple inquiries in a short period are more detrimental, suggesting a high debt-seeking pattern or financial difficulty. Hard inquiries remain on a credit report for up to two years, though their impact lessens after 12 months.

Conversely, closing older credit accounts can negatively affect a score. Closing an account decreases total available credit, which can increase the credit utilization ratio if balances exist on other cards. For instance, closing a $5,000 limit card with $2,000 debt elsewhere makes utilization appear higher. Additionally, closing old accounts shortens the average age of credit history, another scoring factor. An account closed in good standing can remain on a credit report for up to ten years, but its closure can still lead to a less favorable credit profile.

Major Negative Events

Severe financial events cause substantial, long-lasting damage to a credit score. These public records or derogatory marks have a more profound impact and take longer to recover from than other issues. Bankruptcy is among the most damaging events.

A Chapter 7 bankruptcy, involving asset liquidation, can remain on a credit report for up to ten years. A Chapter 13 bankruptcy, a court-approved repayment plan, generally stays for up to seven years. Both signal an inability to manage financial obligations, severely impacting creditworthiness.

Foreclosure, where a lender repossesses property due to missed mortgage payments, also severely damages credit. It typically remains on a credit report for seven years from the first missed payment that led to it. This indicates a failure to meet a secured loan obligation, making new mortgage financing difficult. Repossession of an asset, like a vehicle, due to non-payment also negatively affects a credit score. This mark can stay on a credit report for up to seven years from the first missed payment that initiated the process, signaling default and high risk to lenders.

Identity Theft and Credit Report Errors

Credit scores can suffer from circumstances beyond an individual’s control, such as identity theft and credit report errors. Identity theft occurs when someone uses personal information to open fraudulent accounts or make unauthorized charges. Non-payment of these debts quickly accumulates negative entries on the victim’s credit report.

Fraudulent activity leads to unauthorized hard inquiries, increased credit utilization, and missed payments, causing a rapid and significant score drop. This fraudulent information makes obtaining legitimate credit challenging. Errors on a credit report, even without identity theft, can also negatively impact a score. Inaccuracies include incorrect personal information, accounts not belonging to the individual, incorrect account statuses (e.g., paid account reported as delinquent), or duplicate accounts. Incorrect balances or credit limits can skew the utilization ratio. Such errors can lower a credit score, potentially leading to higher interest rates or credit denials.