Why Your Credit Score Goes Down: 6 Common Reasons
Uncover the financial actions and circumstances that commonly lead to a decrease in your credit score.
A credit score is a dynamic number reflecting an individual’s financial behavior, evolving with spending and repayment patterns. This score provides lenders with a snapshot of creditworthiness, influencing access to loans, credit cards, and even rental agreements. Understanding why this score might decrease is helpful for maintaining financial health and making informed decisions.
Payment Behavior
Payment history is a significant determinant of credit scores. Even a single misstep can impact the score, with severity increasing based on the tardiness and frequency of missed payments. A payment reported 30, 60, or 90-plus days past due carries more weight the longer it remains unpaid.
Missing payments or defaulting on accounts signals a higher risk to lenders, suggesting an inability to manage financial obligations responsibly. A late payment can remain on a credit report for up to seven years from the original delinquency date. Consistently paying bills on time is a primary method for maintaining a healthy credit score.
Credit Usage
The amount of credit used relative to the total available credit, known as the credit utilization ratio, heavily influences credit scores. This ratio is typically calculated by dividing total credit card balances by the total credit limits across all revolving accounts. Maintaining a high utilization ratio, generally considered to be above 30%, can indicate a higher risk to lenders and lead to a score decrease.
Maxing out credit cards or lines of credit significantly elevates this ratio, negatively affecting the score. Closing a credit card account can inadvertently increase the utilization ratio if it reduces total available credit while existing balances remain. A lower credit utilization ratio demonstrates responsible credit management and is favorable for credit scores.
New Credit Activity
Seeking new credit often results in a temporary dip in a credit score due to “hard inquiries.” When applying for a new loan or credit card, a lender performs a hard inquiry to review your credit report. Each hard inquiry can cause a small, temporary decrease, typically by a few points.
Multiple hard inquiries within a short period, especially for different types of credit, can be interpreted as a higher risk, suggesting an urgent need for credit or potential financial distress. Additionally, opening new accounts can reduce the average age of all credit accounts, which also contributes to a temporary score reduction. The impact of these inquiries usually diminishes over a few months, and they remain on a credit report for up to two years.
Public Records and Collections
Severe financial events that become part of public records or are sent to collections can drastically lower a credit score. These include bankruptcies, foreclosures, and civil judgments. Bankruptcies can remain on a credit report for seven to ten years from the filing date. Foreclosures typically stay on a credit report for seven years from the first missed payment that led to the action.
Accounts sent to collections also have a significant negative impact and generally remain on credit reports for seven years from the date of the first missed payment that led to the collection status. While tax liens and civil judgments no longer appear on credit reports as public records, these events are public information and can still be accessed by potential lenders, landlords, or employers, indicating a history of financial difficulty.
Credit History Changes
Changes to the length and composition of one’s credit history can affect a credit score. The average age of credit accounts is a factor in credit scoring models, with a longer history generally viewed more favorably by lenders. Closing an old, established credit card account can reduce this average age, potentially leading to a score drop, even if the account had a positive payment history.
Closing an account also reduces total available credit, which can increase the credit utilization ratio if other accounts carry balances. Individuals with a short credit history, such as those new to credit, may have lower scores because there is less data available for lenders to assess their repayment behavior. Maintaining a diverse mix of credit accounts, including both revolving credit (like credit cards) and installment loans (like mortgages or car loans), can also contribute positively to a credit score.