Which Action Can Hurt Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. It assesses how likely a person is to repay borrowed money on time. This score is derived from information in credit reports, compiled by major credit bureaus such as Equifax, Experian, and TransUnion.

Lenders rely on credit scores to evaluate the risk of extending credit. A higher score indicates lower risk, making it easier to qualify for loans, credit cards, and better interest rates. Conversely, a lower score can lead to loan denials, higher interest rates, and less favorable terms for financial products like mortgages and auto loans. Your credit score impacts securing housing, obtaining insurance, and the overall cost of borrowing.

Missing Payments and Defaults

Missing payments are highly detrimental to a credit score, as payment history constitutes about 35% of most credit scoring models. Even a single payment reported 30 days past its due date can significantly lower a credit score. The negative impact intensifies with each successive missed payment, such as 60 or 90 days late.

Creditors report late payments to credit bureaus once an account is at least 30 days overdue. Making a payment within this 30-day window typically prevents it from being recorded as late on credit reports. If the account remains unpaid, the delinquency deepens, leading to more severe score reductions.

When payments are missed for an extended period, usually between 120 and 180 days, the loan may enter default. Defaulting on a loan, whether it is a credit card, mortgage, or auto loan, signals to lenders a high risk of non-payment and can cause a substantial drop in a credit score, potentially over 100 points. This severe negative mark can make it difficult to obtain future credit or secure favorable interest rates.

An account may also be sent to collections or “charged off” by the original creditor if payments are not resumed. A charge-off occurs when a creditor deems a debt uncollectible and writes it off as a loss, typically after 120 to 180 days of missed payments. Debts sent to a collection agency or charged off accounts are reported to credit bureaus and reflect a significant financial setback.

Under the Fair Credit Reporting Act (FCRA), most negative information, including late payments, defaults, collections, and charge-offs, can remain on a credit report for up to seven years from the date of the original delinquency. While the impact of these negative entries lessens over time, their presence can continue to hinder access to credit and influence borrowing costs throughout this period.

High Credit Card Balances

The credit utilization ratio, which is the amount of available credit being used, significantly impacts credit scores. This ratio is calculated by dividing the total revolving credit used by the total available revolving credit. For example, a $1,000 balance on a $5,000 limit card results in 20% utilization.

Lenders view a high credit utilization ratio as an indicator of increased risk. Financial experts suggest keeping the overall credit utilization ratio below 30% for a healthy credit score. Individuals with excellent credit often have single-digit utilization rates. Exceeding 30% can lead to a noticeable drop in credit scores.

Maxing out credit cards, using 100% or close to 100% of the available limit, is particularly damaging. This signals to lenders that a borrower may be experiencing financial distress and relying heavily on credit, increasing their perceived risk. A maxed-out card can cause a substantial decrease in a credit score.

Unlike late payments, the impact of credit utilization can recover quickly once balances are paid down. Credit bureaus update balances monthly, so reducing outstanding debt can improve a score within a billing cycle or two. It is important to monitor both overall credit utilization and individual account utilization.

Opening New Credit Accounts

Applying for new credit accounts can temporarily lower a credit score due to “hard inquiries” or “hard pulls.” A hard inquiry occurs when a lender checks a credit report for a loan or credit card application. Each hard inquiry can cause a small, temporary dip of a few points.

While a hard inquiry remains on a credit report for up to two years, its impact usually diminishes after 12 months. Credit scoring models recognize that consumers shop for rates on significant loans like mortgages or auto loans. For these, multiple inquiries within a short period (typically 14 to 45 days) are often grouped as a single inquiry, minimizing the negative effect.

Applying for many new accounts in a short timeframe, especially for different credit types, signals higher risk to lenders. This behavior can lead to a more significant and lasting negative impact. Opening numerous new accounts can also reduce the “average age of accounts” on a credit report.

The length of credit history, including the average age of all credit accounts, is a factor in credit scoring, accounting for about 15% of a FICO score. A shorter average age of accounts, resulting from many new accounts, is less favorable to lenders. Therefore, space out credit applications and apply only for genuinely needed credit.

Serious Public Record Events

Serious public record events are among the most damaging actions to a credit score, leaving long-lasting negative marks. These events indicate significant financial distress and severely impact creditworthiness. Their presence makes it challenging to obtain new credit, secure favorable interest rates, or even rent an apartment.

Bankruptcy is one of the most severe public record events, signaling an inability to manage debt. A Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, remains on a credit report for 10 years from the filing date. A Chapter 13 bankruptcy, involving a repayment plan, is removed from a credit report after seven years. Both types of bankruptcy can cause a substantial drop in credit scores, potentially 100 to 200 points or more, especially for individuals with good credit prior to filing.

Foreclosures, which occur when a lender repossesses a home due to missed mortgage payments, also have a devastating impact. A foreclosure can stay on a credit report for seven years from the date of the first missed payment that led to the action. This event severely lowers a credit score and signals high risk to future lenders, making it difficult to secure another mortgage or other types of loans.

Similarly, a repossession, where a lender seizes collateral like a car due to loan default, remains on a credit report for seven years from the date of the first missed payment. This action indicates a failure to fulfill a secured loan obligation, significantly damaging the credit score. While the impact of these public record events lessens over time, their presence on a credit report for many years underscores their severity.