Why Would My Credit Score Go Down?

A credit score serves as a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. Lenders and creditors utilize these scores to assess the potential risk associated with extending credit, influencing decisions on loan approvals, interest rates, and credit limits. Credit scores are dynamic and can fluctuate based on various activities reported to credit bureaus. This score reflects information contained within your credit report, which includes your financial behaviors and obligations.

Payment Performance Changes

Payment history holds the most significant weight in determining credit scores, often accounting for approximately 35% of a FICO score. Any deviation from timely payments can lead to a notable decrease in your score. Even a single payment reported as 30 days past due can cause a significant drop, especially for individuals with a strong credit history. Payments that are 60 or 90 days late further intensify the negative effect, signaling increased risk to lenders. If an account goes unpaid for an extended period, it risks being sent to collections or charged off by the creditor. These derogatory marks, such as accounts in collections, charge-offs, bankruptcies, or foreclosures, are severe negative events that can remain on a credit report for up to seven years from the date of initial delinquency, making obtaining new credit challenging.

Credit Usage Increases

Another substantial factor influencing credit scores is credit utilization, which represents the amount of revolving credit you are currently using compared to your total available revolving credit. This ratio is typically expressed as a percentage and is a key indicator lenders use to evaluate how effectively you manage existing debt. A high credit utilization ratio signals increased risk to lenders and can cause your credit score to drop. Financial experts generally recommend maintaining a credit utilization ratio below 30% to demonstrate responsible credit management. Consistently using a significant portion or all of your available credit can lead to a substantial score decrease. When a credit card balance reaches its limit, your utilization ratio for that card jumps to 100%. This high utilization suggests potential financial instability, negatively affecting your ability to secure future loans or favorable interest rates.

New Credit Applications

Applying for new credit can also lead to a temporary decrease in your credit score. When you apply for a loan, credit card, or other forms of credit, a lender typically performs a “hard inquiry” on your credit report. A hard inquiry is a request to review your credit report as part of the application process and usually causes a small, temporary dip in your score. Multiple inquiries in a short period can have a compounding negative effect. While hard inquiries typically remain on your credit report for up to two years, their impact on your credit score usually diminishes within 12 months. Opening new accounts also affects the average age of all your credit accounts. A shorter average age of accounts can be viewed as a higher risk by lenders, contributing to a score decrease. Additionally, closing old, established credit accounts can sometimes negatively impact a score by reducing the total available credit and potentially shortening the average age of accounts.

Credit Report Inaccuracies

A credit score can also decrease due to information on your credit report that is incorrect or fraudulent. Errors on a credit report, such as incorrectly reported late payments, accounts that do not belong to you, or other factual mistakes, can negatively impact your score. These inaccuracies can misrepresent your financial behavior and lower your perceived creditworthiness. Identity theft is a significant cause of such inaccuracies, where a thief uses your personal information to open new accounts or make unauthorized charges on existing ones. These fraudulent activities, including new credit inquiries, increased credit utilization, or unpaid balances, will appear on your credit report as negative items. The presence of these derogatory entries, even if they are not your responsibility, can cause a substantial drop in your credit score.