Why Did My Credit Score Go Down?

A credit score, typically ranging from 300 to 850, is a numerical representation of creditworthiness, indicating the likelihood of repaying a loan. Lenders use these scores as a primary factor when making approval decisions and determining interest rates and terms. A higher score signifies a lower financial risk to lenders, potentially leading to more favorable credit terms. Understanding how this score fluctuates is important for managing personal finances effectively.

Common Reasons for a Credit Score Drop

A primary reason for a credit score decline is late or missed payments. Payment history is a significant component of credit scoring models. Even a single payment reported as 30 days late can negatively affect a score, with 60 or 90-day delinquencies causing further drops. These derogatory marks can remain on a credit report for up to seven years from the date of the missed payment.

Increased credit utilization, the amount of credit used compared to total available credit, is another cause of score reduction. A high utilization ratio suggests a greater reliance on credit, which can signal increased risk to lenders. Financial experts recommend keeping credit utilization below 30% of the total available credit to maintain a healthy score.

Applying for new credit can lead to a temporary decrease in a credit score due to “hard inquiries.” When a lender reviews a credit report for a new credit application, a hard inquiry is generated, which can slightly lower the score. While the impact is minor and temporary, multiple hard inquiries in a short period can suggest a higher credit risk.

Closing old credit accounts can lower a credit score. This reduces total available credit, increasing the credit utilization ratio if balances remain. Closing an older account can also shorten the average age of a credit history, another factor considered in credit scoring.

Negative public records, such as bankruptcies, foreclosures, or civil judgments, can impact a credit score. These events indicate financial distress and remain on credit reports for extended periods, typically seven to ten years depending on the type. Their presence can hinder access to new credit.

Identity theft or fraud can cause a credit score drop. If a thief opens new accounts or makes unauthorized charges in someone’s name, these activities, including new credit inquiries and unpaid balances, will appear on the victim’s credit report. This fraudulent activity contributes to a lower score.

Errors on a credit report can lead to a score decrease. These inaccuracies include incorrect personal information, accounts belonging to another person with a similar name, or accounts mistakenly reported as late or delinquent. Duplicate accounts or incorrect current balances and credit limits are common errors.

Understanding Your Credit Report and Score

Regularly checking credit reports is an important step in understanding and maintaining financial health. This allows monitoring credit activity and identifying discrepancies or changes that could impact scores. Identifying the specific reason for a score drop often begins with a thorough review of these reports.

Federal law provides access to free credit reports from each of the three major nationwide credit bureaus: Equifax, Experian, and TransUnion. These reports can be obtained through AnnualCreditReport.com. Consumers currently have access to free weekly reports.

When reviewing a credit report to investigate a score drop, several pieces of information warrant attention. Look for new accounts that were not opened, unauthorized credit inquiries, or any late payment notations that are incorrect. High balances on credit accounts, particularly revolving ones, should be noted, as they influence credit utilization. Also scrutinize public records, collection accounts, or unrecognized entries that could indicate identity theft or fraud.

Credit scores, such as FICO and VantageScore, are generated based on the data contained within these credit reports. While different scoring models exist and may weigh factors differently, the underlying information in the credit report is the primary source for score calculation. Therefore, the report provides the factual basis for any score changes.

Taking Action After a Score Drop

After identifying the reason for a credit score drop, taking steps can help address the underlying issues. If an error on a credit report is discovered, it is important to dispute the inaccurate information with the credit bureau reporting it. This can be done online, by phone, or by mail, and requires explaining the error and providing supporting documentation. Credit bureaus are required to investigate disputes within 30 days and correct or remove information found to be inaccurate.

For issues related to high credit utilization, several strategies can help reduce balances. Paying down debt, especially on credit cards, is effective. Making multiple payments within a billing cycle can lower the reported balance. Requesting a credit limit increase on existing accounts can improve the utilization ratio by increasing available credit, provided spending does not increase. Avoiding the closure of older, established credit accounts is advisable, as this can negatively impact the average age of accounts and total available credit.

If late payments are the cause, the best action is to bring all accounts current as soon as possible. While a late payment remains on a report for seven years, its impact on the score diminishes over time, especially with consistent on-time payments thereafter. In cases of temporary financial difficulty, contacting creditors before a payment becomes delinquent may allow for alternative arrangements.

When a score drop is due to new credit applications, the impact is temporary, and the score recovers over time. Avoid unnecessary applications for new credit, particularly within a short timeframe, to prevent further inquiries. This practice helps stabilize the credit profile.

If identity theft is suspected as the cause of a score drop, action is necessary to protect financial information. Placing a fraud alert on credit reports informs lenders to verify identity before extending new credit. A credit freeze can be placed with each of the three major credit bureaus, restricting access to the credit report and preventing new accounts from being opened. Reporting the theft to the Federal Trade Commission and reviewing credit reports for any further unauthorized activity are important steps.