Why Is My Credit Score Dropping?

A credit score represents an individual’s financial behavior and creditworthiness. Understanding factors that cause a credit score to decrease is important for financial health.

Payment History Changes

Payment history holds significant weight in credit score calculations, typically accounting for about 35% of a FICO score. A primary reason for a credit score decline is late or missed payments. Payments reported as 30, 60, or 90 days past due can severely impact a score, with severity increasing the longer a payment is delayed. Even a single payment reported 30 days late can cause a notable drop, particularly for individuals with a strong credit history. Creditors typically report payments to credit bureaus once they are 30 days or more overdue.

The negative effect of a late payment can persist on a credit report for up to seven years from the date of the missed payment. While the impact lessens over time, newer and more frequent late payments have a greater detrimental effect. Beyond late payments, more serious derogatory marks like collections and charge-offs also significantly damage credit scores. An account sent to collections indicates an original creditor has given up on collecting the debt and transferred it to a collection agency. Collection accounts can remain on a credit report for seven years from the date of the first missed payment that led to the collection process.

A charge-off occurs when a creditor deems a debt uncollectible, usually after 180 days of non-payment, writing it off as a loss. While the debt is considered a loss by the creditor, the individual remains legally responsible for repayment, often to a debt collector. Charge-offs are severe negative events and can substantially lower credit scores, remaining on a credit report for seven years from the initial delinquency date.

Higher Credit Utilization

Credit utilization is another significant factor influencing credit scores, typically accounting for 30% of a FICO score. This ratio is calculated by dividing total outstanding balances on revolving credit accounts, such as credit cards, by the total available credit limit. A high credit utilization ratio indicates a greater reliance on borrowed funds, which lenders may interpret as increased financial risk. Maintaining a credit utilization ratio below 30% is generally recommended for a healthy credit score. However, individuals with excellent credit often keep their utilization below 10%.

Even if payments are made on time, high balances can trigger a score drop because they suggest financial strain. Maxing out credit cards, for example, signals a borrower might be having difficulty managing finances without relying heavily on debt. Both overall credit utilization across all accounts and utilization on individual cards are considered in credit scoring models. A high utilization rate on just one card, even if the overall ratio is acceptable, can still negatively affect a score.

Recent Credit Applications

Applying for new credit can lead to a temporary decrease in a credit score. Each time a lender requests a credit report to evaluate a new credit application, it results in a “hard inquiry” on the credit report. A hard inquiry can reduce a credit score by a few points, though the impact is minor and short-lived, often recovering within a few months. Multiple hard inquiries within a short period can be viewed as risky behavior by lenders, potentially indicating financial distress or a high need for credit. Hard inquiries remain on a credit report for up to two years, though most credit scoring models only consider those from the past 12 months.

Opening new credit accounts can affect the “average age of accounts” on a credit report. A shorter average age of accounts can negatively impact a credit score, particularly for those with a long-established credit history. Conversely, closing an old, unused credit account might inadvertently increase the credit utilization ratio if it reduces the total available credit, which could also lead to a score drop.

Negative Financial Events

Beyond day-to-day payment issues, severe negative financial events can cause significant and prolonged damage to a credit score. Events such as bankruptcy, foreclosure, and repossessions are major derogatory marks. Bankruptcy can remain on a credit report for up to seven or ten years, depending on the type. Foreclosure, which occurs when a lender repossesses a property due to missed mortgage payments, also has a lasting negative impact. Similarly, a repossession, where a lender takes back an asset like a vehicle due to loan default, severely damages credit.

As of 2017 and 2018, civil judgments and most tax liens are generally no longer included on credit reports by the major credit bureaus. This means these specific public records do not directly impact credit scores through their presence on the report. However, the underlying unpaid debts that led to a judgment or tax lien, such as late payments or collection accounts, will still appear on the credit report and can significantly harm the score.

Inaccuracies and Fraud

Sometimes, a credit score drop may not be due to an individual’s financial actions but rather to errors or fraudulent activity on their credit report. Common inaccuracies can include incorrect late payments being reported, accounts that have been paid off still showing a balance, or accounts that do not belong to the consumer appearing on their report. Data entry mistakes or misidentification can lead to incorrect personal information, such as a misspelled name or an inaccurate address, or even a mixed credit file where another person’s information is combined with yours.

Identity theft is a significant cause of score drops unrelated to one’s own spending habits. Thieves might use stolen personal information to open new credit accounts or make fraudulent charges on existing ones. These unauthorized accounts or charges can quickly lead to high balances, missed payments, or new hard inquiries, all of which negatively impact a credit score. Regularly reviewing credit reports from the three major bureaus (Equifax, Experian, and TransUnion) is important to identify and dispute any such errors or signs of fraud.