Why Does My Credit Score Go Down?
Uncover the various financial behaviors and external events that can cause your credit score to decline. Gain clarity on credit score fluctuations.
A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. Lenders utilize this score to assess the likelihood of an applicant repaying loans. A higher credit score signifies a lower risk to lenders, which can lead to better terms on financial products such as credit cards, auto loans, and mortgages. Conversely, a lower score can result in higher interest rates or even denial of credit. Beyond traditional lending, credit scores can also influence other aspects of personal finance, including insurance premiums and rental applications.
Payment History
Payment history is the most influential factor in calculating a credit score, accounting for approximately 35% of a FICO score. It reflects how consistently an individual makes payments. Making payments on time demonstrates financial responsibility and contributes positively to a credit score.
Conversely, late or missed payments can significantly harm a credit score. Even a single payment reported as 30 days past due can cause a noticeable decrease. The negative impact intensifies with the duration of the delinquency (e.g., 60 or 90 days past due) and frequency. Accounts that go into default or are sent to collections indicate severe payment issues and can remain on a credit report for several years.
Credit Utilization
Credit utilization measures the amount of credit an individual is currently using compared to their total available credit. This ratio is a significant factor in credit scoring, making up about 30% of a FICO score. A high credit utilization rate can indicate an increased reliance on borrowed funds, which lenders may view as a higher risk.
Financial experts suggest keeping credit utilization below 30% across all revolving credit accounts, such as credit cards. For example, if an individual has a total credit limit of $10,000, maintaining balances below $3,000 is recommended. Exceeding this threshold, even with on-time payments, can negatively impact a credit score by suggesting financial overextension.
Closing older credit accounts can inadvertently increase credit utilization by reducing total available credit. This makes existing balances appear as a larger percentage of the remaining limit, potentially leading to a score decrease.
New Credit and Account Activity
Applying for new credit can also influence a credit score, particularly due to hard inquiries. A hard inquiry occurs when a lender checks an individual’s credit report after they apply for a new loan or credit card. While a single hard inquiry has a minor, temporary effect, multiple inquiries in a short period signal to lenders that an individual may be seeking significant new debt, viewed as a higher risk.
Opening several new accounts simultaneously can also lower the average age of credit accounts. The length of credit history is a factor in credit scoring models, and a shorter average age of accounts can lead to a temporary score reduction. Furthermore, closing older credit accounts can shorten an individual’s overall credit history. This action can reduce the average age of accounts and increase credit utilization if it reduces total available credit, contributing to a score decline.
Public Records and Potential Fraud
Certain public records can severely impact a credit score, indicating significant financial distress. Events such as bankruptcies, foreclosures, and tax liens are reported to credit bureaus and remain on a credit report for typically seven to ten years. The presence of these items can lead to substantial and long-lasting reductions in a credit score, making it challenging to obtain new credit or favorable terms.
Beyond these formal public records, inaccuracies on a credit report or instances of identity theft can also cause an unexpected drop in a credit score. Errors might include incorrect payment statuses, accounts that do not belong to the individual, or fraudulent activity. Regularly reviewing credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—is important to identify and dispute discrepancies, preventing or mitigating score damage.