Why Do Credit Scores Go Down? The Primary Reasons

A credit score is a numerical summary of an individual’s creditworthiness, providing lenders with an assessment of risk. This three-digit number is derived from your credit report, detailing your borrowing and repayment history. Credit scores are dynamic, fluctuating based on financial activities and reporting updates. Understanding factors that cause scores to decline is important for maintaining sound financial health.

Impact of Late and Missed Payments

Making payments past their due date directly affects a credit score. The severity of this impact depends on how late the payment is reported, categorized as 30, 60, or 90-plus days overdue. A 30-day late payment can cause a noticeable drop, with negative effects intensifying for longer delinquencies.

Payment history is a significant component of credit scoring models, sometimes accounting for as much as 35% of a FICO Score. Even a single late payment can lead to a score reduction. These delinquencies can remain on a credit report for up to seven years from the original missed payment date.

The negative impact of a late payment is most severe when first reported, diminishing over time as the delinquency ages. If a late payment progresses to a charge-off or is sent to a collection agency, consequences become much more significant and long-lasting.

Effect of High Credit Utilization

Credit utilization refers to the amount of revolving credit used compared to the total available revolving credit. This ratio significantly influences credit scoring models, often affecting as much as 30% of a FICO Score. A high credit utilization ratio signals higher risk to lenders, suggesting over-reliance on credit or potential financial distress.

A commonly accepted guideline is to keep credit utilization below 30% across all revolving accounts. Exceeding this threshold, such as by maxing out credit cards or maintaining high balances, can decrease credit scores. For instance, if a consumer has $7,000 in debt on cards with a total limit of $25,000, their utilization is 28%. If total available credit decreases or balances increase, pushing the ratio above 30%, the score can decline.

The impact of credit utilization on a score is immediate, as changes reflect once account activity is reported by creditors to credit bureaus. Maintaining a low utilization rate demonstrates responsible credit management.

Consequences of New Credit Applications

Applying for new credit, such as a new credit card, auto loan, or mortgage, results in a “hard inquiry” on a credit report. A hard inquiry occurs when a lender checks an individual’s credit file for a new credit product. Each hard inquiry can cause a small, temporary dip in a credit score, usually by fewer than five points.

Hard inquiries can remain on a credit report for up to two years, though their impact on credit scores diminishes after 12 months. Multiple hard inquiries within a short timeframe can have a more noticeable negative effect, suggesting increased financial risk to lenders. For example, numerous credit card applications in a short period might be viewed as an attempt to obtain credit quickly due to financial difficulties.

Credit scoring models account for “rate shopping” for specific loans, such as mortgages, auto loans, or student loans. If multiple inquiries for these loans occur within a concentrated period, 14 to 45 days, they may be treated as a single inquiry to minimize score impact. This allows consumers to compare loan offers without undue penalty.

Derogatory Marks and Public Records

Derogatory marks are severe negative entries on a credit report that indicate a failure to repay debt. These marks include accounts sent to collections, charge-offs, bankruptcies, foreclosures, and repossessions. Such events signal high risk to lenders and can significantly lower a credit score.

An account goes to collections when it remains unpaid for an extended period, at least 120 days past due. Collection accounts remain on a credit report for seven years from the date of the first missed payment that led to the collection process. A foreclosure stays on a credit report for seven years from the date of the first missed payment.

Bankruptcies have a particularly profound and long-lasting impact. A Chapter 7 bankruptcy can remain on a credit report for up to 10 years from the filing date, while a Chapter 13 bankruptcy stays for seven years. These financial events can affect a consumer’s ability to qualify for new credit, loans, or housing for several years. The negative effect of these marks lessens over time, but they remain visible on the report for their full duration.

Changes from Closing Credit Accounts

Closing a credit account can lead to a decrease in a credit score, primarily through two mechanisms. First, closing an account reduces the total available credit. If an individual carries balances on other credit cards, this reduction increases their overall credit utilization ratio. As credit utilization is a key factor in credit scoring, a higher ratio negatively impacts the score.

Second, closing an older credit account can shorten the average age of a credit history. The length of credit history is a factor in credit scoring models, with longer histories generally viewed more favorably. Closing an account, especially one open for a long time, can reduce the average age of all active accounts, potentially leading to a score drop.

Even if an account is closed in good standing with a zero balance, it can still affect the average age of accounts and the credit utilization calculation. Closed accounts in good standing remain on a credit report for up to 10 years, but their closure can alter the overall credit profile. Careful consideration is warranted before closing any credit account.