Why Is My Credit Score Going Down?
Learn the various factors that can cause your credit score to decrease. Understand how financial activities and reporting impact your score.
A credit score is a numerical representation of an individual’s creditworthiness. It is generated from information in your credit report, detailing your financial history. Lenders, landlords, and service providers use these scores to assess risk. A higher score indicates lower risk, potentially leading to more favorable terms for loans, credit cards, and housing.
Understanding your credit score influences many financial aspects of life. While it can improve with diligent financial management, it can also decrease due to various factors. These fluctuations reflect changes in financial behavior or circumstances, signaling different risk levels to creditors. Monitoring your score and understanding its components helps manage your financial standing.
Changes in Payment Behavior
Payment history is a primary factor influencing credit scores; any deviation from timely payments significantly impacts your score. When payments are not made by their due date, creditors may report delinquency to credit bureaus. The score drop correlates with how late the payment is reported (e.g., 30, 60, or 90+ days past due). A single late payment, especially for those with excellent credit, can cause a noticeable score reduction.
Creditors typically report payments as late after 30 days past the due date, though late fees may apply sooner. While its impact lessens over time, its presence indicates higher risk to lenders. Consistently making payments on time is fundamental to maintaining a healthy credit profile.
Shifts in Credit Usage
Credit utilization, the amount of credit used compared to total available credit, plays a substantial role in credit scoring. A high credit utilization ratio signals increased financial risk to lenders, potentially decreasing your credit score. Experts suggest keeping this ratio below 30% across all revolving credit accounts.
Closing older credit accounts, even with a zero balance, can negatively affect credit utilization. This reduces total available credit, inadvertently increasing your utilization ratio if outstanding debt remains the same. Maintaining open, older accounts with responsible use contributes positively to your credit profile and utilization.
New Credit Applications
Applying for new credit can temporarily lower your credit score through a “hard inquiry.” A hard inquiry occurs when a lender checks your credit report after you apply for a new loan, credit card, or other credit product. Each hard inquiry can result in a slight, temporary score drop. These inquiries typically remain on your credit report for up to two years, though their impact usually diminishes after 12 months.
Multiple hard inquiries in a short period can signal increased risk to lenders, leading to a more significant score reduction. However, credit scoring models often account for rate shopping, grouping multiple inquiries for the same type of loan (e.g., mortgage or auto loan) within a specific timeframe as a single inquiry. This allows consumers to compare offers without excessive score penalties. Opening several new credit accounts simultaneously, especially if it leads to a sudden increase in overall debt, can be viewed as risky behavior by scoring models.
Major Negative Financial Events
Severe financial events can profoundly damage credit scores. Bankruptcies are among the most impactful negative events. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, while a Chapter 13 bankruptcy typically stays for seven years from the filing date. These events signal an inability to manage debt, making it challenging to obtain new credit.
Foreclosures, repossessions, and charge-offs also have substantial negative consequences. Most negative items, including late payments, foreclosures, repossessions, charge-offs, and collection accounts, typically remain on your credit report for seven years from the date of the original delinquency or first missed payment. Accounts sent to collections represent severely unpaid debts transferred to a collection agency. Each of these major negative events indicates a serious default on financial obligations, leading to substantial, long-lasting reductions in credit scores.
Credit Report Discrepancies
Sometimes, a credit score may drop due to factors unrelated to a consumer’s direct financial decisions, such as credit report discrepancies. Identity theft is a concern, where fraudulent accounts or unauthorized activities appear on your credit report. These unauthorized entries can negatively impact your score by showing false delinquencies or excessive credit inquiries.
Errors on a credit report can also cause a score to decline. Common mistakes include incorrect late payment notations, accounts that do not belong to you, or inaccurate balances. These inaccuracies can misrepresent your financial health and lead to an unwarranted decrease in your credit score. The Fair Credit Reporting Act (FCRA) provides consumers the right to dispute inaccurate information on their credit reports.
Regularly checking your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) is important for identifying discrepancies. If an error is found, you can dispute it directly with the credit bureau and the company that provided the incorrect information. Providing supporting documentation can help ensure the issue is investigated and corrected, which may help restore your credit score.