Why Did My Credit Score Decrease? Common Reasons
Learn why your credit score may have decreased. This guide explains the key financial and reporting factors affecting your credit standing.
A credit score serves as a numerical representation of an individual’s creditworthiness, influencing access to loans, credit cards, and even rental agreements. Credit scores are dynamic, changing frequently based on financial activities and reported information. Understanding why scores decrease helps identify issues and take corrective actions. Monitoring these scores is an important part of maintaining financial health.
Payment History Impact
Payment history is a primary factor influencing credit scores. Late or missed payments on any credit account, including credit cards, auto loans, mortgages, or student loans, can negatively affect a score. The severity of the impact depends on how late the payment is and the individual’s credit profile. For instance, a payment reported 30 days past due will cause a score drop, with more severe declines for payments 60, 90, or 120 days late.
A single late payment can significantly impact a credit score, with higher scores experiencing a more substantial drop. These negative marks remain on a credit report for up to seven years from the date of the missed payment, though their influence on the score lessens over time. Consistent on-time payments following a delinquency can help mitigate the long-term damage.
Accounts that go into default represent a serious breach of a credit agreement, severely affecting credit scores. Defaulting indicates a failure to meet financial obligations and signals higher risk to potential lenders. This makes obtaining new credit or favorable terms challenging in the future. Defaults impact creditworthiness for many years.
Credit Utilization and New Debt
Credit utilization (the amount of revolving credit used compared to total available credit) is another significant factor in credit score calculations. A high credit utilization ratio, above 30%, can lead to a decrease in credit scores. For example, if an individual has a total credit limit of $10,000 across all credit cards and carries a balance of $4,000, their utilization is 40%, which is viewed unfavorably. Maintaining a lower utilization ratio, below 30%, demonstrates responsible credit management.
Opening new credit accounts can cause a temporary dip in a credit score. Each application for new credit, such as a credit card or a loan, results in a “hard inquiry” on the credit report. While a single hard inquiry has a minimal and temporary effect, potentially reducing a score by fewer than five points, multiple inquiries in a short period can signal higher risk to lenders and lead to a more noticeable score drop. Hard inquiries remain on a credit report for two years, though their impact on the score diminishes after about 12 months.
Taking on new debt, even if managed responsibly, can temporarily lower a credit score. This is due to increased financial obligation and potentially higher credit utilization if the new debt is a revolving account. New accounts also lower the average age of an individual’s credit history. A shorter average age of accounts suggests less experience managing credit, which may be perceived as a higher risk.
Serious Public Records and Collection Accounts
Certain financial events appear as public records on a credit report and can damage a credit score. These include bankruptcy, which remains on a credit report for seven to ten years depending on the type (Chapter 13 for seven years, Chapter 7 for ten years). Foreclosures and civil judgments also have a negative impact, signaling a failure to meet financial obligations. These events make it more difficult to obtain new credit or secure favorable interest rates for an extended period.
Accounts sent to collections represent a negative mark on a credit report. When an account becomes delinquent, the original creditor may send it to a collection agency or sell the debt. Even a small debt can cause a drop in credit scores. Collection accounts remain on a credit report for seven years from the date of the original delinquency.
While tax liens were previously reported on credit reports and could lower scores, all three major credit bureaus removed tax liens from credit reports starting in 2017-2018. Therefore, a tax lien no longer directly impacts an individual’s credit score through credit reports. However, tax liens are still public records and can influence a lender’s decision-making process, as they indicate past financial difficulties.
Credit Report Discrepancies
Errors and discrepancies on a credit report can lead to an unexpected decrease in a credit score, even if the individual has been managing their finances responsibly. These inaccuracies can include incorrect late payments, accounts that do not belong to the individual, or mixed files where an individual’s information is combined with someone else’s. Such mistakes can misrepresent an individual’s credit behavior and result in a lower score. The Fair Credit Reporting Act (FCRA) provides consumers with the right to dispute inaccurate or incomplete information on their credit reports.
Identity theft and fraud are also potential reasons for unauthorized activity appearing on a credit report, which can lower a score. If an identity thief opens new accounts or makes fraudulent charges in an individual’s name, these activities can lead to delinquent payments and high credit utilization, all of which negatively impact credit scores. Detecting such unauthorized activity requires careful review of credit reports. Individuals should regularly check their credit reports from credit bureaus for any unfamiliar accounts or transactions.
Disputing errors involves contacting the credit reporting agency and the information furnisher, providing documentation to support the claim. The credit bureau is required to investigate the dispute within 30 days. Promptly addressing these discrepancies is important to prevent them from continuing to negatively affect creditworthiness.