Why Does My Credit Score Keep Dropping?

A credit score numerically represents an individual’s creditworthiness. Lenders use this score to assess risk when extending credit. Understanding the factors that influence these scores is important, as fluctuations can occur.

Your Payment History

Payment history most substantially influences your credit score. Even a single late or missed payment can significantly reduce your score, with severity increasing based on delinquency. Payments reported as 30, 60, or 90 days past due cause more damage, reflecting growing risk to lenders. Creditors typically report a payment as late once it is at least 30 days past its due date.

Accounts sent to collections or charged off by the original creditor indicate severe financial distress and cause substantial, long-lasting damage. A charge-off occurs when a creditor deems an unpaid debt uncollectible. More severe derogatory marks, such as bankruptcies, foreclosures, or repossessions, profoundly impact your credit. These events signal a failure to meet financial obligations, leading to considerable score reductions.

Negative marks like late payments, collections, charge-offs, foreclosures, and repossessions generally remain on your credit report for seven years from the original delinquency date. Bankruptcies can stay for seven to ten years from the filing date. While these entries persist, their impact diminishes over time, especially with consistent on-time payments after the event.

How You Use Your Credit

Credit utilization, the ratio of outstanding credit card balances to total available credit limits, is another significant factor that can cause your score to drop. A high utilization rate, particularly above 30% or 50%, signals increased risk to lenders, even with on-time payments. For example, a $5,000 balance on $10,000 total credit results in 50% utilization, negatively affecting your score. Keeping overall utilization low, ideally below 10%, is recommended for a strong credit score.

Applying for new credit can temporarily lower your score due to a “hard inquiry.” A hard inquiry occurs when a lender checks your credit report for a loan or credit card application. While a single inquiry usually results in a minor score reduction, multiple inquiries in a short period can have a compounding effect, suggesting higher financial distress. Hard inquiries remain on your credit report for up to two years, though they typically only affect your score for about 12 months.

The length of your credit history also influences your score, indicating how long accounts have been open and managed. A longer history of responsible credit use generally contributes positively, demonstrating a proven ability to manage debt. Closing older accounts, especially those with a long history of positive payments, can shorten your average credit age and potentially decrease your score. This reduces your credit profile’s longevity, which lenders consider when assessing financial stability.

Your credit mix, referring to different types of credit accounts like revolving credit (e.g., credit cards) and installment loans (e.g., mortgages, auto loans), is another factor. While less impactful than payment history or credit utilization, a diverse mix shows lenders your ability to manage various forms of debt responsibly. A sudden change, such as paying off all installment loans and having only revolving credit, could slightly affect your score by reducing portfolio diversity. However, its impact is generally minor compared to other factors.

Issues Beyond Your Direct Control

Factors outside your direct control can cause an unexpected drop in your credit score. Credit report errors are common, where inaccuracies or mistakes appear. These errors can include misreported late payments, accounts not belonging to you, or incorrect account statuses, all negatively impacting your score. Identifying and rectifying such errors is important, as they might falsely portray higher risk to lenders.

Identity theft and fraud represent severe external threats. If personal information is compromised, unauthorized accounts could be opened or fraudulent charges appear on existing accounts. These illicit activities severely damage your credit score, introducing negative entries and increased debt you did not incur. Monitoring credit reports closely helps detect such activity early.

Public records, such as tax liens or civil judgments, can appear on your credit report and lead to a significant score decrease. These records indicate legal actions due to unpaid debts or financial obligations. Their presence signals high financial risk to potential creditors, resulting in substantial negative impacts on your creditworthiness.

Regularly checking credit reports from Equifax, Experian, and TransUnion is crucial for identifying and addressing these issues promptly. This proactive monitoring allows you to spot discrepancies, fraudulent activity, or new public records detrimental to your score. Promptly disputing inaccuracies or unauthorized activities can help mitigate negative effects.