Why Does My Credit Score Keep Going Down When I Pay on Time?

Seeing your credit score drop can be confusing, especially when you consistently make on-time payments. While timely payments are fundamental for a healthy credit profile, they are only one component in calculating your credit score. Many other factors influence this numerical representation of your creditworthiness, and changes in any of these areas can lead to unexpected fluctuations. Understanding these elements is essential to comprehend why your score might not always reflect your payment discipline alone.

Credit Utilization Shifts

Your credit utilization ratio significantly impacts your score, even with timely payments. This ratio compares the amount of revolving credit you use to your total available revolving credit. For example, a $3,000 balance on a $10,000 credit card limit results in 30% utilization. Keeping this ratio below 30% across all revolving accounts is advised.

An increase in outstanding balances, even with on-time payments, can raise this ratio and negatively affect your score. This occurs if you make a large purchase, carry a balance over several billing cycles, or use a significant portion of your available credit. If the balance reported to credit bureaus is high relative to your limit, your score can decrease, even if you pay the minimum or full statement balance. Credit utilization is dynamic, changing monthly as new balances are reported, directly influencing your score.

Recent Credit Inquiries and Account Activity

Applying for new credit also influences your score. Lenders perform a “hard inquiry” on your credit report to assess risk when you apply for loans or credit cards. Each hard inquiry can temporarily reduce your score by a few points, remaining on your report for up to two years, though its impact diminishes over time. Multiple hard inquiries in a short period may suggest you are seeking significant new debt, which lenders perceive as increased risk.

Opening new credit accounts, even if approved, can lower the average age of your credit accounts. A longer credit history signals more financial stability. Adding new, young accounts can shorten this average, potentially causing a score decline. Closing older credit accounts, especially those with a long history and high limits, can reduce your overall available credit and shorten your average account age, negatively affecting your score.

Derogatory Information and Public Records

Past derogatory information or public records can weigh down your credit score, even with current on-time payments. These negative marks indicate a history of not meeting financial obligations and remain on your credit report for an extended period. Examples include collection accounts, charge-offs, foreclosures, and bankruptcies. A collection account arises when a creditor sells an unpaid debt to a collection agency after persistent delinquency.

Most derogatory marks, such as late payments, collections, and charge-offs, remain on your credit report for about seven years from the date of original delinquency. Bankruptcies can stay on your report for seven to ten years; a Chapter 7 bankruptcy remains for ten years, while a Chapter 13 bankruptcy stays for seven years from the filing date. The presence of these items continues to signal higher risk to lenders and can suppress your credit score regardless of recent payment behavior.

Errors on Your Credit Report

Unexpected drops in your credit score can sometimes be attributed to inaccuracies or errors on your credit report. Mistakes can occur due to data entry errors, misreported account statuses, or identity theft, where fraudulent accounts are opened in your name. These errors might include incorrect payment histories, accounts that do not belong to you, or inaccurate reporting of credit limits and balances.

The Fair Credit Reporting Act (FCRA) grants consumers the right to access their credit reports and dispute inaccurate information. You are entitled to a free copy of your credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Regularly reviewing these reports allows you to identify and address discrepancies. Correcting such errors can improve your credit score, as accurate information provides a true reflection of your financial responsibility.