Why Did My Credit Score Go Down?

A credit score is a numerical summary of your creditworthiness, typically a three-digit number ranging from 300 to 850. This score acts as a prediction of your financial behavior, indicating how likely you are to repay borrowed money on time. Lenders and other financial institutions use this score to evaluate the risk associated with offering you credit.

A higher credit score generally signals a lower risk to lenders, which can lead to more favorable terms for loans, credit cards, and mortgages. Conversely, a lower score might result in higher interest rates or even a denial of credit. Beyond lending, credit scores can also influence factors like insurance premiums, utility deposits, and rental agreements.

Common Reasons for Credit Score Decline

A decline in your credit score often stems from specific financial events or actions. Understanding these common triggers helps identify why your score may have decreased and how to prevent future drops.

A late or missed payment on a credit account is the most impactful reason. Payments reported as 30, 60, or 90-plus days past due can significantly lower your score, with severity increasing the longer the delay.

An increase in your credit utilization ratio is another frequent cause. This ratio represents the amount of revolving credit you are currently using compared to your total available revolving credit. Maintaining high balances, especially exceeding 30% of your credit limit, can signal increased risk to lenders and negatively affect your score.

Applying for new credit often leads to a temporary dip. Each time you apply for a new credit card or loan, a “hard inquiry” is placed on your credit report, which can slightly reduce your score. Multiple inquiries within a short timeframe can have a more pronounced negative effect, as it may suggest a higher credit risk to potential lenders.

Closing an old credit account can sometimes unexpectedly impact your score. Closing unused accounts can reduce your total available credit, increasing your credit utilization ratio if balances remain the same. Closing an account, especially one with a long history, can also shorten the average age of your credit accounts.

Severe negative events, such as accounts sent to collections, bankruptcies, or foreclosures, cause substantial drops. These derogatory marks indicate a significant failure to meet financial obligations and can remain on your credit report for seven to ten years. Identity theft or fraudulent activity can also lead to unauthorized accounts, missed payments, and high balances, causing your score to drop.

Key Factors Influencing Your Score

Your credit score is generated by complex models that weigh various aspects of your financial behavior. These models, such as FICO and VantageScore, consider similar categories of information. Understanding these factors provides insight into how your financial actions translate into your score.

Payment history is the most significant factor, typically accounting for about 35% of your FICO Score. This reflects consistent, on-time payments across all credit accounts, including credit cards, loans, and mortgages. A history of consistent, on-time payments demonstrates reliability and is crucial for a strong credit score.

Amounts owed, or credit utilization, is the second most impactful factor, making up approximately 30% of your FICO Score. This measures debt relative to available credit limits, particularly for revolving accounts. Keeping your credit utilization ratio low, ideally below 30%, indicates responsible credit management and positively influences your score.

The length of your credit history contributes around 15% to your FICO Score. This considers the age of your oldest, newest, and average open accounts. A longer credit history with well-managed accounts indicates more experience and benefits your score.

New credit, representing about 10% of your FICO Score, reflects recent applications and newly opened accounts. Frequent applications or opening many accounts in a short period can signal increased risk and cause a temporary dip. Your credit mix, also about 10% of your FICO Score, assesses the diversity of your credit accounts, such as revolving and installment loans. Managing different credit types responsibly is viewed favorably.

Monitoring Your Credit

Regularly monitoring your credit information is a proactive step in maintaining financial wellness and quickly identifying any changes to your score. This practice allows you to spot inaccuracies or fraudulent activity that could negatively impact your credit standing. Staying informed about your credit report and score empowers you to address issues promptly.

You are entitled to a free copy of your credit report weekly from each of the three major nationwide credit reporting agencies: Equifax, Experian, and TransUnion. The official, federally authorized website for obtaining these reports is AnnualCreditReport.com. It is important to use this specific site to avoid impostor websites that may try to sell you services or collect your personal information.

While your free credit reports from AnnualCreditReport.com do not include your credit score, many credit card companies, banks, and free online services offer access to your credit score. These scores may vary slightly depending on the scoring model used, such as FICO or VantageScore, but they provide a good general indication of your credit health. Always be aware that the score you see might not be the exact score a lender uses.

When reviewing your credit report, scrutinize several key areas for accuracy. Check for correct personal information, including your name, addresses, and Social Security number, as misspellings or unfamiliar details can indicate errors or identity theft. Carefully examine all listed accounts for any you do not recognize, incorrect account statuses like late payments you believe were made on time, or balances that seem too high.

Additionally, look for any hard inquiries you did not authorize, as these can signal attempts to open fraudulent accounts in your name. If you discover any inaccuracies or suspicious activity, it is important to dispute these errors directly with the credit reporting agency and the information provider. Timely action can prevent further damage to your credit score.