What Would Make Your Credit Score Go Down?
Grasp the diverse financial dynamics and pivotal moments that can lead to a lower credit score, influencing your financial standing.
A credit score is a numerical representation of an individual’s creditworthiness, influencing access to loans, housing, and insurance. Understanding factors that decrease a score is important for financial stability and favorable lending terms. Awareness allows individuals to protect their credit standing.
Payment History Issues
Falling behind on payments significantly declines a credit score. A single payment 30 days past due causes a notable drop, worsening with longer delinquencies. These negative marks can remain on a credit report for up to seven years from the original delinquency date.
Missing payments or defaulting on loans leads to severe consequences. A default means failing to meet loan terms, often resulting in creditor action. Unpaid debt may be sold to a collection agency, substantially reducing a credit score. These remain on a report for about seven years from the original delinquency date.
A charge-off occurs when a creditor writes off a debt as uncollectible. This indicates severe delinquency and significantly lowers a credit score, often preceding collections. Repossession or foreclosure due to unpaid loans also profoundly impact credit scores. These events remain on credit reports for about seven years, making new credit challenging.
Credit Utilization and New Accounts
Credit utilization, the amount of credit used compared to total available credit, significantly impacts scores. A high utilization ratio, typically above 30%, can lower a score by suggesting a higher default risk. For example, a $900 balance on a $1,000 limit card is 90% utilization, considered very high. This signals potential over-reliance on credit, seen as a financial risk.
Applying for multiple new credit accounts quickly can negatively affect a score. Each application results in a “hard inquiry,” temporarily lowering it. While a few inquiries have minimal effect, many signal a desire for new debt, appearing riskier. New accounts also reduce the average age of credit accounts, indicating a less established history.
Closing old credit accounts, especially those with good payment records, can inadvertently lower a score. This reduces total available credit, which can increase the credit utilization ratio if balances remain. For example, closing a $5,000 limit card with a $1,000 balance on another $2,000 limit card increases utilization from 14% to 33%. Additionally, closing older accounts can shorten the overall average age of credit history, impacting the score.
Major Financial Events
Major financial events, often involving legal proceedings, can drastically reduce a credit score. Bankruptcy is among the most severe, with different chapters carrying varying implications. A Chapter 7 bankruptcy, involving asset liquidation, can remain on a credit report for up to 10 years, severely affecting new credit. A Chapter 13 bankruptcy, involving a repayment plan, typically remains for seven years.
Bankruptcy signals significant financial distress to lenders. Its presence on a credit report can lead to automatic denials for most credit applications and higher interest rates. While court judgments and tax liens previously appeared, direct reporting of paid civil judgments and tax liens by major credit bureaus largely ceased in 2017. However, an unpaid judgment or lien could still lead to other reported negative credit events like collections or wage garnishment.
Other Factors
Identity theft and fraudulent accounts can decrease a credit score, often without immediate knowledge. Unauthorized accounts can lead to missed payments, defaults, and collections. These negative entries impact the victim’s score until the fraud is identified and disputed. Monitoring credit reports and placing fraud alerts or credit freezes are important steps to mitigate this risk.
Errors on a credit report can cause an unexpected score drop. Inaccuracies might include incorrect late payment notations, accounts not belonging to the individual, or incorrect balances. Such errors unfairly lower a credit score by misrepresenting financial behavior. Regularly reviewing credit reports from Equifax, Experian, and TransUnion is important to identify and dispute discrepancies. Correcting these errors helps restore an accurate credit score.