Why Your Credit Score Decreased: Main Reasons

A credit score represents a numerical summary of an individual’s creditworthiness. Lenders use these scores to assess the risk associated with extending credit, influencing decisions on loans, credit cards, and even housing or insurance applications. A significant decrease often signals a specific underlying cause. Understanding these causes helps individuals identify the issue and manage their financial standing.

Payment History

Payment history stands as the most significant factor influencing credit scores. Lenders view consistent, on-time payments as a strong indicator of financial responsibility. A single late payment, even if only by a few days, can negatively impact a credit score. The severity depends on how late the payment was and the individual’s overall credit history.

Payments reported 30, 60, or 90 days past their due date cause progressively more damage. The more recent a late payment occurred, the more pronounced its effect will be. As time passes, the negative impact of an old late payment tends to diminish.

If a payment remains unpaid for an extended period, the account may be sent to a collection agency. An account going into collections can severely harm a credit score, often remaining on a credit report for up to seven years from the original delinquency date. Multiple late payments or accounts sent to collections can have a compounding negative effect.

Credit Utilization and New Accounts

Credit utilization refers to the amount of revolving credit an individual is currently using compared to the total amount of available revolving credit. This ratio is a major component in credit score calculations. A high credit utilization ratio, generally considered to be above 30%, can indicate an increased risk of financial difficulty and often leads to a decrease in credit score. For example, if an individual has a credit card with a $10,000 limit and carries a balance of $7,000, their utilization is 70%, which is likely to negatively affect their score.

Maxing out credit cards or consistently carrying high balances close to credit limits signals to lenders that an individual might be over-reliant on credit. Maintaining low balances across all credit accounts, even if available credit is high, helps demonstrate responsible credit management.

Applying for new credit, such as a new loan or credit card, typically results in a “hard inquiry” on a credit report. Each hard inquiry can temporarily lower a credit score by a few points, usually for a period of several months. While one or two inquiries might have a minimal impact, applying for multiple new accounts within a short timeframe can be perceived as risky behavior by lenders.

Closing an old credit account can also inadvertently affect a credit score, particularly if it reduces the overall available credit or shortens the average length of an individual’s credit history. For example, closing an old, unused credit card with a high limit could increase the utilization ratio on remaining cards, even if balances haven’t changed. This action might also shorten the overall age of an individual’s credit accounts, which is another factor in credit scoring models.

Public Records and Other Significant Marks

Certain major financial events can severely impact a credit score, often appearing as public records or significant derogatory marks on a credit report. Bankruptcies, for instance, are among the most damaging events for a credit score and can remain on a credit report for up to 7 or 10 years, depending on the type of bankruptcy filed.

Foreclosures, which occur when a lender repossesses a property due to unpaid mortgage payments, also significantly harm a credit score. This mark can stay on a credit report for approximately seven years. Similarly, tax liens, which are government claims against an individual’s assets for unpaid taxes, can drastically reduce a score and remain on a report for an extended period, often until the tax debt is paid.

Civil judgments, resulting from court orders to pay a debt, can also appear on a credit report and negatively affect a score. Collection accounts, which are debts sold to collection agencies, also represent a serious negative mark. They typically remain on reports for seven years from the date of original delinquency.

Checking Your Credit Report

Understanding why a credit score decreased often begins with reviewing your credit report. Federal law entitles individuals to a free copy of their credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once every 12 months. The official website to access these reports is AnnualCreditReport.com.

Upon obtaining a credit report, individuals should carefully examine all sections for any new or changed information. Look for recent late payments, especially those marked 30, 60, or 90 days past due, as these are common culprits for score drops. Additionally, check for new credit accounts or hard inquiries that might have occurred recently, as these can also depress a score.

Reviewing credit utilization on revolving accounts is also important; confirm that balances haven’t unexpectedly risen or that credit limits haven’t been reduced, which could inflate the utilization ratio. Furthermore, identify any public records such as bankruptcies, foreclosures, or tax liens, or any collection accounts that may have been recently added to the report. It is also important to check for any errors or signs of identity theft, such as accounts opened in your name without your knowledge, which should be disputed immediately with the credit bureau.