Why Does My Credit Score Drop? Common Reasons

A credit score numerically represents an individual’s creditworthiness, indicating the likelihood of repaying borrowed funds. Typically ranging from 300 to 850, this three-digit number helps lenders assess the potential risk associated with extending credit. Credit scores are largely based on information found in credit reports, which are compiled by the three major U.S. credit bureaus: Equifax, Experian, and TransUnion.

A higher score often leads to better access to financial products, such as credit cards, auto loans, and mortgages, and can result in more favorable terms, including lower interest rates. Conversely, a lower score can make it more difficult to qualify for credit or may result in higher borrowing costs. Credit scores are dynamic, meaning they can fluctuate based on various financial activities and changes reflected in your credit report. Understanding the factors that cause these scores to drop is key to maintaining financial health.

Payment Behavior

Payment history significantly influences credit scores. Consistently making payments on time helps build and maintain a strong credit profile. Conversely, late or missed payments can lead to a considerable drop in a credit score.

Even a single payment missed by 30 days or more can negatively impact a score. The severity of this impact increases with the duration of the lateness, such as 60 or 90 days past due, and if multiple payments are missed. These negative marks can remain on a credit report for up to seven years from the original delinquency date. Accounts that go unpaid and are sent to collections or charged off by creditors represent severe negative events. A collection account means a debt has been sold to a collection agency, while a charge-off means the creditor has written off the debt as a loss. Both can significantly depress a credit score.

Credit Utilization

Credit utilization, also known as amounts owed, represents the proportion of total available credit currently in use. This ratio is calculated by dividing your total outstanding credit card balances by your total credit limits. A high credit utilization ratio signals a higher risk to lenders and can cause a credit score to decline.

Experts generally advise maintaining a credit utilization ratio below 30% to avoid a negative impact. For instance, if you have a total credit limit of $10,000 across all your credit cards, keeping your combined balances below $3,000 is often recommended. Maxing out credit cards can severely damage a credit score, as this behavior suggests an over-reliance on credit and an increased risk of default.

Having high balances across multiple accounts can also be detrimental, even if one individual card is not maxed out. Lenders assess your overall debt burden in relation to your total credit availability. While closing an old, paid-off account might seem like a positive step, it can inadvertently increase your credit utilization ratio by reducing your total available credit, potentially leading to a score drop.

New Credit Activity

Seeking new credit can temporarily influence a credit score. When you apply for new credit, such as a loan or a credit card, lenders typically perform a “hard inquiry” on your credit report. A hard inquiry is a formal request to view your credit history and can cause a small, temporary dip in your credit score.

While one hard inquiry might have a minimal effect, multiple hard inquiries within a short period, especially for different types of credit, can be viewed negatively by scoring models. This behavior may suggest to lenders that you are experiencing financial difficulties or are taking on too much debt too quickly. Each hard inquiry can typically remain on your credit report for up to two years, though their impact on your score usually diminishes after a few months.

Opening new credit accounts also impacts the average age of your credit accounts. If you open several new accounts in a short timeframe, it can lower the overall average age of your credit history, which is a factor in credit scoring models. A shorter average age of accounts can be seen as less favorable, as it suggests a less established credit history compared to someone with long-standing accounts.

Account Management and History

Existing credit account management and history significantly contribute to a credit score. The length of your credit history, including the age of your oldest account and the average age of all accounts, plays a role in calculations. A longer, well-managed credit history generally contributes positively to your score.

Closing an old, long-standing account, even if paid off, can negatively impact the “length of credit history” component. This removes that account’s age from your overall average, potentially shortening your credit history and making it appear less established. Additionally, closing a credit card account reduces your total available credit, which can increase your credit utilization ratio if you carry balances on other cards, leading to an unexpected score drop.

A balanced mix of different credit types, such as revolving credit (like credit cards) and installment loans (like mortgages or auto loans), can be beneficial. A sudden shift away from a diverse credit mix, such as paying off and closing all installment loans without maintaining revolving credit, could also impact your score. Accounts inactive for extended periods might eventually be closed by the issuer, affecting average age of accounts and credit utilization.

Major Negative Events and Errors

Severe financial events and inaccuracies on a credit report can lead to substantial, long-lasting drops in a credit score. Public records, such as bankruptcies, foreclosures, repossessions, and judgments, are considered major negative events. Bankruptcies can remain on a credit report for up to 10 years, while foreclosures, repossessions, and judgments typically remain for seven years or longer depending on state laws. These events indicate a significant inability to manage financial obligations and severely impact creditworthiness.

Identity theft and fraud represent another serious threat to credit scores. If fraudulent accounts are opened in your name or unauthorized activity occurs on your existing accounts, it can lead to unexpected and significant score drops. Regularly monitoring credit reports from the three major bureaus is important to detect such issues promptly. Consumers are entitled to a free copy of their credit report from each bureau annually, which can help in identifying suspicious activity.

Credit report errors, such as incorrect late payments, accounts that do not belong to you, or inaccurate balances, can unfairly depress a credit score. These inaccuracies are not due to consumer behavior but rather data reporting mistakes. If an error is identified, it is important to dispute it directly with the credit bureau and the information provider. Correcting these errors can help restore your credit score to its accurate reflection of your financial behavior.