Why Did My Credit Score Go Down So Much?

A credit score is a numerical representation, typically ranging from 300 to 850, that indicates a person’s creditworthiness. Lenders use this number to assess the likelihood an individual will repay debts on time. Your credit score is derived from information in your credit reports, compiled by Equifax, Experian, and TransUnion. A higher score generally leads to more favorable terms on loans, credit cards, and can impact insurance rates or housing applications.

Issues with Payment History

Payment history is a primary factor in credit scoring models, often carrying the most weight. Even a single late payment can negatively affect a credit score, with the impact increasing the later the payment. For instance, a payment 30 days past due causes a notable drop, with 60, 90, and 120-day delinquencies causing greater damage. The higher an individual’s initial credit score, the more substantial the point reduction from a late payment.

If a payment remains unpaid for an extended period, typically after 90 days, the account may be deemed in default. A default indicates a failure to meet payment obligations and can damage a credit score, potentially causing a drop of over 100 points, especially for those with strong credit histories. Defaulted accounts remain on a credit report for seven years, even if the debt is paid. This negative mark can hinder future access to loans and credit at favorable rates.

Accounts that go into collection or are charged off represent more severe delinquencies. A collection account means a creditor has sold or assigned the debt to a third-party after direct collection attempts failed. A charge-off occurs when a creditor writes off the debt as a loss, typically after 180 days of non-payment. Both collection accounts and charge-offs remain on a credit report for up to seven years from the original delinquency date and can lead to score reductions ranging from 165 to 185 points. These entries signal high credit risk to lenders.

Increased Credit Utilization

Credit utilization is a ratio comparing the total amount of revolving credit used to the total available credit. This ratio, expressed as a percentage, is a significant component of credit scoring, often considered the second most important factor after payment history. A high credit utilization ratio indicates a large portion of available credit is being used, suggesting increased financial risk to lenders.

Financial experts recommend maintaining a credit utilization ratio below 30% across all revolving credit accounts. Exceeding this threshold can negatively affect a credit score, even with on-time payments. For example, a $4,000 balance on a $10,000 credit limit results in a 40% utilization ratio, potentially decreasing your score. A lower utilization ratio is generally better for a credit score.

Paying down credit card balances effectively improves this ratio. Even with active credit card use, paying off balances before the statement closing date helps keep reported utilization low. Conversely, reduced credit limits or closed accounts decrease available credit, which can inadvertently increase the utilization ratio and negatively impact the score if balances remain the same.

New Credit Applications and Account Changes

Applying for new credit often results in a “hard inquiry” on a credit report. This occurs when a lender requests to view a credit file for a loan or credit product application. While a single hard inquiry typically causes a minor, temporary dip of fewer than five points, multiple inquiries in a short period can have a compounding effect. Numerous applications can signal to scoring models that an individual is relying too heavily on new credit. Hard inquiries remain on a credit report for two years, though their impact generally diminishes after 12 months.

Opening new credit accounts can influence a credit score by impacting the average age of all credit accounts. Credit scoring models favor a longer credit history, as it demonstrates responsible debt management. A new account lowers the overall average age of accounts, which can lead to a score reduction, particularly for those with a short credit history.

Closing older, established credit accounts can inadvertently harm a credit score. Closing an account reduces total available credit, which can increase the credit utilization ratio if balances are carried on other cards. Closing an old account also shortens the overall length of credit history, removing a positive historical record. While accounts in good standing may remain on a credit report for up to 10 years after closure, their active contribution to available credit and average account age ceases.

Public Record Information and Reporting Errors

Certain public record items can cause damage to a credit score. Due to changes in reporting standards, bankruptcy is generally the only type of public record information routinely reported by major credit bureaus. A bankruptcy filing, indicating an inability to repay debts, can remain on a credit report for seven to ten years, depending on the type filed. Such an entry signifies financial distress and can lead to a long-lasting drop in a credit score.

Errors on credit reports can also lead to unexpected score drops. These inaccuracies include incorrectly reported late payments, accounts that do not belong to the individual, or other erroneous negative information. Identity theft is a concern, where fraudsters open new accounts in someone else’s name, incur debt, and fail to make payments, resulting in fraudulent negative entries. Such unauthorized activity can lower a credit score and make it difficult to obtain future credit.

The Fair Credit Reporting Act (FCRA) grants individuals the right to dispute inaccurate or incomplete information on their credit reports. Regularly checking credit reports from each of the three major bureaus for accuracy is important for identifying and addressing errors. Promptly disputing discrepancies and, in cases of identity theft, filing an identity theft report with the Federal Trade Commission and placing fraud alerts or security freezes can help mitigate damage and restore a credit score.