Why Did My Credit Score Drop? Common Causes
Understand why your credit score decreased. Explore the common financial behaviors and major events that influence your credit standing.
A credit score serves as a numerical representation of an individual’s creditworthiness, summarizing their financial behavior. This three-digit number influences various aspects of financial life, including the ability to secure loans, rent housing, and even obtain certain types of insurance. Understanding the factors that cause this score to fluctuate is important for maintaining financial health.
Understanding Payment-Related Impacts
Payment history holds significant weight in credit scoring models, making it a primary determinant of score fluctuations. Missing a payment, even by a short period, can lead to a notable decline in a credit score. For instance, a payment reported as 30 days past due can cause a score to drop by dozens of points.
The severity of the impact increases with the delinquency period, as payments reported 60 or 90 days past due indicate a greater risk. These longer delays result in more substantial score reductions. A completely missed payment or an account defaulting on its terms can lead to severe consequences for a credit score.
When an account goes to a collection agency, it is reported to credit bureaus and remains on a credit report for an extended period, significantly damaging the credit score. Similarly, a charge-off occurs when a lender deems a debt uncollectible and writes it off as a loss. This action also profoundly impacts a credit score, indicating a serious inability to repay borrowed funds.
How Credit Usage Affects Your Score
Beyond payment timeliness, the way credit is managed and utilized also significantly influences credit scores. High credit utilization, which is the ratio of your outstanding credit card balances to your total available credit, can negatively affect a score. Maintaining balances that approach or exceed a substantial portion of available credit, such as 30% or more, often leads to a score decrease.
Applying for new credit can also cause a temporary dip in a credit score due to “hard inquiries.” When a lender checks a credit report to evaluate a new application, a hard inquiry is recorded. While a single inquiry might have a minimal effect, multiple inquiries within a short timeframe can suggest a higher risk, collectively lowering the score. Furthermore, opening new accounts can reduce the average age of all credit accounts, which also contributes to a slight score reduction over time.
Closing older credit accounts can negatively impact a credit score. Such an action reduces the total amount of available credit, which can immediately increase the credit utilization ratio on remaining active accounts, even if balances remain unchanged. Additionally, closing older accounts shortens the overall length of credit history, a factor that credit scoring models consider important for demonstrating long-term financial responsibility.
Major Financial Events and Data Inaccuracies
Certain major financial events can lead to a substantial and prolonged drop in a credit score. Filing for bankruptcy is one such event, remaining on a credit report for seven to ten years and can cause a score to plummet by hundreds of points. This public record indicates a severe financial distress, signaling a high level of credit risk to potential lenders.
Similarly, a foreclosure on a home or a repossession of a vehicle significantly damages a credit score. These events are reported to credit bureaus and typically stay on a credit report for seven years, making it challenging to obtain new credit during that period. Each instance reflects a failure to meet significant financial obligations and can lead to substantial score reductions.
Identity theft and fraud represent external factors that can severely impact a credit score. Unauthorized accounts, fraudulent charges, or inquiries due to identity theft can depress a score. Monitoring credit reports for suspicious activity helps identify and address such issues. Additionally, errors on a credit report, such as incorrect late payments, accounts that do not belong to the individual, or inaccurate balances, can mistakenly lower a credit score. Reviewing credit reports for accuracy is important.