Why Did My Credit Score Go Down?

A credit score is a three-digit number, usually ranging from 300 to 850, that represents your credit risk to potential lenders. Lenders use these scores to evaluate applications for various credit products, such as mortgages, auto loans, and credit cards. A higher score often leads to more favorable terms, including lower interest rates.

How Credit Scores are Structured

Credit scores are calculated based on information within your credit reports, using mathematical formulas known as scoring models. While different models exist, such as FICO and VantageScore, they generally consider similar categories of information. The FICO score, widely used by lenders, weighs five main factors in its calculation.

Payment history is typically the most significant factor, accounting for approximately 35% of a FICO score. Following this, the amounts you owe, also known as credit utilization, makes up about 30% of your score.

The length of your credit history contributes around 15% to your score. New credit, which includes recent applications for credit, accounts for about 10% of the score. Finally, your credit mix comprises the remaining 10% of the calculation.

Common Actions That Lower Scores

A common reason for a credit score drop is late or missed payments, which significantly impacts your payment history. Even a single payment reported 30 days or more past due can cause a notable decrease in your score.

High credit card balances or increased credit utilization also frequently lead to score reductions. If you use a large portion of your credit limit, for example, exceeding 30% of your available credit, it can signal higher reliance on credit and negatively affect your score.

Opening new credit accounts can cause a temporary dip in your score, impacting the “new credit” category. While one inquiry might have a minor effect, applying for multiple new accounts in a short period can be seen as a higher risk by lenders, leading to a more pronounced score decrease.

Accounts sent to collections, charge-offs, bankruptcies, or foreclosures are severe negative events that can substantially damage your credit score. A collection account indicates a debt that has gone unpaid for an extended period and been sold to a collection agency. Bankruptcies and foreclosures are public records that reflect significant financial distress and can remain on your credit report for many years, impacting your score for an extended duration.

Identity theft or fraudulent activity can also cause an unexpected score drop. If someone opens accounts or makes purchases in your name, these unauthorized activities will appear on your credit report.

Investigating Your Score Change

To identify the specific reason for a credit score decrease, you should obtain copies of your credit reports. The Fair Credit Reporting Act allows you to get a free copy of your credit report every 12 months from the major credit bureaus. You can access these reports through AnnualCreditReport.com.

When reviewing your credit reports, look for any recent changes or unfamiliar entries. Pay close attention to the payment history section for any newly reported late payments. Check the balances on your revolving credit accounts, like credit cards, to see if your credit utilization has increased significantly.

Examine the “new credit” section for any hard inquiries you don’t recognize or new accounts you did not open. Also, scan for any public records, such as bankruptcies or foreclosures, or collection accounts that may have recently appeared. Unfamiliar names, addresses, or accounts could indicate identity theft, which warrants further investigation and dispute.

Regularly monitoring your credit reports for accuracy and unexpected changes is important. While checking your own score is considered a “soft inquiry” and does not affect it, a lender’s review of your credit when you apply for new credit is a “hard inquiry” that can cause a slight, temporary drop.