Why Is My Credit Score Decreasing Every Month?
Is your credit score dropping every month? Understand the underlying causes, learn how to diagnose issues on your credit report, and find actionable steps to improve it.
A credit score is a numerical representation that helps lenders assess an individual’s creditworthiness. This three-digit number, typically ranging from 300 to 850, predicts the likelihood of someone repaying their debts on time. It influences approvals for loans, credit cards, and rental agreements. Understanding why this score might fluctuate is important for managing your financial standing. This article explores common reasons behind a declining credit score.
How Credit Scores Are Determined
Credit scores are calculated based on information within your credit reports, maintained by the three major credit bureaus: Equifax, Experian, and TransUnion. Different scoring models, such as FICO and VantageScore, weigh similar categories to determine your score by analyzing your financial history.
The primary categories influencing a credit score include payment history and amounts owed. Payment history assesses whether bills are paid on time, while amounts owed looks at how much debt is carried relative to available credit. The length of your credit history, reflecting how long accounts have been open, also contributes.
New credit, which includes recent applications and newly opened accounts, impacts your score. Your credit mix, indicating the diversity of credit accounts managed (such as credit cards, installment loans, and mortgages), is another factor.
Key Factors Leading to Score Reductions
Several actions and financial events can lead to a decrease in your credit score. These factors signal increased risk to lenders, impacting your creditworthiness.
One primary impact on a credit score comes from late or missed payments. A payment reported as 30 days or more past due can significantly lower your score. The longer a payment remains unpaid, the more severe the damage to your credit profile, and these negative marks can remain on your credit report for up to seven years.
Increased credit utilization is another common cause for score reductions. This refers to the percentage of your available revolving credit that you are currently using. For example, if you have a total credit limit of $10,000 and owe $5,000, your utilization ratio is 50%. Lenders prefer to see this ratio below 30%, as a higher percentage suggests greater reliance on credit.
Applying for new credit also results in a “hard inquiry” on your credit report. Each hard inquiry can cause a small, temporary dip in your score. Applying for multiple new credit accounts within a short period can be viewed negatively by scoring models, suggesting a higher risk. Hard inquiries typically stay on your credit report for two years, though their impact on your score usually lessens after 12 months.
Shortening your credit history can also negatively affect your score. The average age of your credit accounts is a factor, with a longer history generally being more favorable. Closing an old credit account can reduce your average account age and decrease your total available credit, potentially increasing your utilization ratio on remaining accounts.
Finally, derogatory marks on your credit report represent severe negative financial events. These include public records like bankruptcies or foreclosures, as well as collection accounts or charge-offs. A bankruptcy can remain on your report for up to 10 years, while most other derogatory marks can stay for up to seven years from the date of the original delinquency. Such marks substantially lower your credit score.
Understanding Credit Report Changes
To pinpoint reasons behind a monthly credit score decrease, regularly examine your credit reports. These reports contain the detailed information credit scoring models use, and reviewing them helps identify recent activity or changes that correlate with your score drop. You can obtain a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months through AnnualCreditReport.com.
When reviewing your reports, pay close attention to new accounts, recent credit inquiries, or changes in your payment history, such as newly reported late payments. Look for increases in account balances, which could indicate a rise in your credit utilization ratio. Additionally, check for any derogatory marks, such as collections, charge-offs, or public records, that might have been recently added.
Addressing Identified Issues
Once you have identified the specific issues causing your credit score to decrease, taking targeted action can help improve your financial standing.
If you discover inaccurate information on your credit report, such as a payment incorrectly marked as late or an account you never opened, you have the right to dispute it. You should contact the credit bureau directly, providing clear details of the error and any supporting documentation you may have. The credit bureau is generally required to investigate the dispute within 30 days.
For issues related to high credit utilization, focusing on paying down your revolving credit balances is an effective strategy. Prioritizing accounts with the highest balances or those closest to their credit limits can quickly reduce your utilization ratio, which can positively impact your score as soon as the lower balances are reported. Consistently making more than the minimum payment can accelerate this process.
If your score decrease is linked to new credit inquiries or recently opened accounts, the most direct action is to avoid applying for additional credit unnecessarily. Allowing some time to pass, typically several months, can help mitigate the temporary negative impact of these inquiries. Lenders prefer to see a stable credit application history rather than multiple recent requests.
When dealing with missed payments, contacting the creditor to discuss payment options or arrangements can be helpful, though the negative mark will likely remain on your report. For more severe derogatory marks like collection accounts or charge-offs, understanding the timeframe they remain on your report is important. While these items generally stay for up to seven years, consistent on-time payments on other accounts can help their impact diminish over time.