Why Is My Credit Score Decreasing?

A credit score is a numerical representation of an individual’s creditworthiness, summarizing their financial reliability. This three-digit number, often ranging from 300 to 850, helps lenders assess the risk of extending credit. A higher score indicates lower risk, potentially leading to more favorable interest rates and terms on loans, mortgages, and credit cards. It also influences approvals for rental applications, insurance premiums, and utility services.

Payment History Changes

Payment history holds weight in credit score calculations, with timely payments contributing positively. Conversely, late or missed payments can lower a score. The impact escalates with the delinquency period; a payment reported 30 days past due will cause a score decrease, but 60-day or 90-day late payments have a more pronounced negative effect. These delinquencies signal increased risk to lenders, reflecting an inability to meet financial obligations.

Accounts that go into collection or are charged off also damage a credit score. A collection account arises when a creditor turns over unpaid debt to a third-party agency. This can lead to a drop of 50-100 points or more. A charge-off occurs when a creditor deems a debt unlikely to be collected, typically after 180 days of missed payments. Both collection accounts and charge-offs can remain on a credit report for seven years from the date of original delinquency.

Credit Utilization Fluctuations

Credit utilization measures the amount of revolving credit used against the total available revolving credit. This ratio is a component of credit scoring models. It is calculated by dividing outstanding balances on revolving accounts, such as credit cards, by the total credit limits across those accounts. A high utilization ratio suggests greater reliance on borrowed funds, which lenders may interpret as higher risk.

Experts advise maintaining a credit utilization ratio below 30% to support a healthy credit score. For example, if an individual has a total available credit limit of $10,000 across all credit cards, keeping the collective balance under $3,000 is recommended. Exceeding this threshold can trigger a score decrease, even if all payments are made on time. Closing credit card accounts can also increase the utilization ratio, as it reduces total available credit while existing balances remain. This reduction can cause a temporary negative impact on the credit score.

New Credit Applications

Applying for new credit can lead to a temporary reduction in a credit score due to a “hard inquiry” or “hard pull.” A hard inquiry occurs when a lender requests a credit report to evaluate creditworthiness for a loan or new credit line. Each hard inquiry is recorded on the credit report and can cause a small dip in the score, typically by a few points. These inquiries remain on a credit report for up to two years, though their impact usually diminishes after the first year.

Multiple hard inquiries within a short timeframe can signal increased risk to lenders, suggesting an individual is desperate for credit or attempting to take on new debt. However, credit scoring models account for “rate shopping” for specific types of loans. For instance, multiple inquiries for a mortgage or auto loan within a concentrated period, typically 14 to 45 days, are grouped and treated as a single inquiry to minimize their impact.

Credit Account Age and Mix Adjustments

The average age of credit accounts contributes to a credit score, with a longer credit history viewed more favorably by credit scoring models. This factor reflects an individual’s long-term management of credit. Closing an old credit account, especially one with a positive payment history, can shorten the average age of accounts. Even if the closed account remains on the credit report for several years, its closure can negatively affect the average age calculation, leading to a score decrease.

The mix of credit accounts also plays a role, indicating an ability to manage different types of debt responsibly. A diverse credit portfolio includes both revolving credit, such as credit cards, and installment loans, like mortgages or car loans. While minor shifts in this mix are unlikely to cause score fluctuations, a substantial change—such as eliminating all installment loans or reducing revolving credit options—could lead to adjustments in the credit score. Lenders prefer a balanced and well-managed approach to various credit products.

Derogatory Marks and Public Records

Derogatory marks and public records represent negative events that impact a credit score. These entries indicate a failure to meet financial obligations and remain on a credit report for extended periods. Bankruptcies, for example, are damaging marks, staying on a credit report for seven years for Chapter 13 and up to 10 years for Chapter 7 from the filing date.

Foreclosures, which involve a lender repossessing property due to missed payments, remain on a credit report for seven years from the date of the first missed payment that led to the action. Repossessions of other financed property, such as vehicles, also stay on reports for seven years from the date of the initial missed payment that prompted the repossession. Court judgments, indicating a legal decision that money is owed, can remain on a credit report for seven years from the judgment date.

Credit Report Errors or Fraud

A credit score can decrease due to inaccuracies or fraudulent activity on a credit report, rather than solely from an individual’s financial behavior. Errors can include incorrect late payments reported on accounts paid on time, or accounts that do not belong to the individual appearing on their report. Such discrepancies can falsely inflate credit utilization or introduce negative payment history.

Identity theft, where personal information is used to open fraudulent accounts or make unauthorized transactions, can also lead to a drop in a credit score. These fraudulent activities, if reported to the credit bureaus, appear as legitimate entries until disputed and removed. Regularly reviewing credit reports from all three major bureaus—Experian, Equifax, and TransUnion—is important to identify and address inaccuracies or signs of fraud promptly.