Why Would a Credit Score Drop? Common Causes

A credit score serves as a numerical representation of an individual’s creditworthiness. Credit scores are dynamic and fluctuate based on various financial activities. Understanding the common reasons behind a credit score decrease can help individuals manage their financial health more effectively.

Missed Payments and Negative Marks

Payment history holds significant weight in credit score calculations, making missed or late payments a primary cause for a score decline. A payment reported as 30 days past due can cause a notable drop in a credit score, with the impact often more significant for individuals who previously maintained high scores. This negative mark can remain on a credit report for up to seven years from the date the payment first became delinquent. As payments become progressively later, such as 60 or 90 days past due, the negative effect on the score intensifies.

Accounts that progress to collections represent a severe negative mark on a credit report. A debt in collections typically stays on a credit report for seven years from the month of the first missed payment that led to the collection process. Similarly, more extreme events like charge-offs, bankruptcies, and foreclosures have a substantial and immediate negative impact. Chapter 7 bankruptcies can remain on credit reports for up to 10 years, while Chapter 13 bankruptcies generally stay for seven years from the filing date. These major derogatory marks indicate significant financial distress and can severely limit access to credit.

Increasing Debt Levels

The amount of debt an individual carries, particularly on revolving accounts like credit cards, significantly influences their credit score through credit utilization. This ratio compares the total amount of credit being used to the total available credit. A high credit utilization ratio signals an increased risk to lenders, even if all payments are made on time. Financial experts typically advise keeping credit utilization below 30% of the available credit limit to maintain a healthy score.

Exceeding this 30% threshold, and especially maxing out credit cards, can lead to a rapid and substantial drop in a credit score. When a card’s balance reaches 100% of its limit, the credit utilization for that specific card jumps, sending a clear red flag to credit bureaus. Even if the balance is paid down quickly, the high utilization reported to the credit bureaus can temporarily depress the score until the next reporting cycle. Consistently high debt levels suggest a greater reliance on borrowed funds, which lenders may interpret as a sign of financial strain.

New Credit Applications

Applying for new credit can result in a “hard inquiry” on a credit report, which is a record of a lender checking an individual’s credit history to make a lending decision. Each hard inquiry can cause a small, temporary dip in a credit score, typically by a few points. These inquiries remain on a credit report for up to two years, though their influence on the credit score generally diminishes after the first 12 months.

Multiple hard inquiries within a short timeframe, especially for different types of credit, can be interpreted by lenders as a sign of increased risk. However, credit scoring models often account for “rate shopping” for specific loan types, such as mortgages, auto loans, or student loans. Multiple inquiries for these types of loans within a concentrated period, typically 14 to 45 days, are often counted as a single inquiry to minimize score impact. In contrast, “soft inquiries,” which occur when checking one’s own credit score or during pre-approvals, do not affect the score.

Changes in Account Age and Mix

The average age of credit accounts is a factor in credit score calculations, reflecting the length of credit history. Closing older credit accounts can reduce this average age, potentially leading to a decrease in a credit score. This is because longer credit histories generally demonstrate more experience managing credit responsibly. Maintaining older, established accounts, even if infrequently used, can contribute positively to the overall credit age.

Credit mix, which refers to the diversity of credit accounts, also plays a role in credit scoring. This includes a combination of revolving credit, like credit cards, and installment loans, such as mortgages or auto loans. While this factor typically has a smaller impact on a credit score, accounting for approximately 10% of a FICO score, a sudden shift or a lack of diverse credit types can contribute to a score decline. Lenders may view a balanced mix as an indication of an individual’s ability to manage various forms of debt.

Credit Report Discrepancies

Errors or fraudulent activity present on a credit report can unexpectedly lead to a drop in a credit score. These inaccuracies can misrepresent an individual’s financial behavior and creditworthiness. Common types of errors include incorrect late payments being reported, accounts that do not belong to the individual (often due to identity theft), or inaccurate balances and credit limits. Incorrectly reported closed accounts appearing as open can also negatively affect utilization ratios.

It is important for individuals to regularly review their credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. Consumers are legally entitled to a free copy of their credit report from each of these bureaus annually. Identifying and disputing any inaccuracies promptly can help prevent unwarranted score reductions and ensure the credit report accurately reflects one’s financial history.