Why Did My Credit Score Drop? The Main Causes

A credit score is a numerical summary of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. Lenders and creditors use this score to evaluate the potential risk of extending credit, influencing decisions on loans, mortgages, and credit cards, as well as the interest rates offered. While scores are not static and can fluctuate, an unexpected decrease often signals changes in underlying financial behaviors or external factors. This article explores the primary reasons a credit score might drop.

Impact of Payment Behavior

Payment history is a significant factor in credit scoring models, typically accounting for approximately 35% of a FICO Score. Consequently, any deviation from timely payments can lead to a notable decrease in a credit score. The severity of the impact generally increases with the length of the delinquency.

A single payment reported as 30 days past due can cause a credit score to drop. Creditors typically report these delinquencies to credit bureaus once a payment is at least 30 days late, making the negative mark visible on a credit report. The impact intensifies if the payment becomes 60 or 90 days past due, with a 90-day delinquency usually affecting scores more severely than a 30-day one. These derogatory marks can remain on a credit report for up to seven years from the date of the initial missed payment.

Accounts that progress to a collection status represent a more severe form of delinquency. A collection account indicates that an unpaid debt has been transferred to a collection agency, or sold to a debt buyer, due to prolonged non-payment. These accounts appear on a credit report and can significantly lower credit scores, remaining on the report for up to seven years from the date of the first missed payment that led to the collection.

Public records, such as bankruptcies, foreclosures, or tax liens, are among the most damaging events that can appear on a credit report. These are severe derogatory marks that reflect a significant financial distress or legal action. A bankruptcy filing, for instance, can remain on a credit report for seven to ten years, depending on the type of bankruptcy, while foreclosures and tax liens typically stay for seven years. The presence of such records indicates a high level of credit risk, leading to a substantial and prolonged negative impact on credit scores.

Credit Usage and New Accounts

The amount of credit an individual uses relative to their available credit, known as the credit utilization ratio, plays a significant role in credit scoring, often accounting for 30% of a FICO Score. This ratio is calculated by dividing the total outstanding balances on revolving credit accounts, such as credit cards, by the total credit limits across those accounts. A high credit utilization ratio signals increased risk to lenders, as it suggests a greater reliance on borrowed funds.

Maintaining a credit utilization ratio below 30% is generally recommended for a healthy credit score. Exceeding this threshold, particularly if balances approach or max out credit limits, can lead to a notable decrease in credit scores.

Applying for new credit typically results in a “hard inquiry” on a credit report. This occurs when a lender checks an applicant’s credit history to assess creditworthiness for a new loan or credit card. A single hard inquiry can cause a slight and temporary dip in a credit score, often by fewer than five to ten points. While hard inquiries remain on a credit report for up to two years, their impact on a credit score usually diminishes after 12 months.

Multiple hard inquiries within a short timeframe can have a more pronounced negative effect, as they may indicate a higher credit risk or financial urgency.

Closing older credit accounts can also negatively affect a credit score. This action reduces the total available credit, which can immediately increase the credit utilization ratio if existing balances remain. Furthermore, closing an older account can shorten the average age of all credit accounts, a factor that contributes to the length of credit history in scoring models.

Inaccuracies and Fraud

Errors on a credit report can lead to an unexpected decline in a credit score without any changes in an individual’s financial behavior. These inaccuracies can misrepresent creditworthiness to scoring models and lenders. Common types of credit report errors include incorrect late payments that were actually made on time, accounts that do not belong to the individual (known as mixed files), or incorrect balances and credit limits. Outdated information, such as discharged debts or accounts that should have fallen off the report, can also negatively affect a score.

Identity theft represents a serious form of credit report inaccuracy, leading to significant score drops. In such cases, a fraudulent party may use stolen personal information to open new credit accounts or misuse existing ones in the victim’s name. These fraudulent accounts often accumulate unpaid debts, which then appear as delinquencies or collection accounts on the victim’s credit report. Hard inquiries from these unauthorized credit applications also contribute to the score reduction.

The negative marks resulting from identity theft, such as new lines of credit with high balances or missed payments, can severely damage a credit score. These fraudulent activities can remain on a credit report for years if not addressed. Regularly reviewing credit reports is important for promptly identifying and addressing any errors or suspicious activity.