At a Glance
Your credit score reflects your spending habits and financial discipline, so it’s important to consider all the factors contributing to its decline. Many times, simply missing payments or having too high of utilization ratios on your credit cards can drag it down. Too many inquiries into opening new lines of credit can also be detrimental.
To help protect your credit score and ensure it remains super attractive, it’s important to stay up to date with payments, regularly check for errors, and keep track of your utilization rate. Between 2010 and 2020, the average FICO score increased from 687 to 711. If you notice yours is not following this trend, you should identify the areas for improvement and work on turning your score around.
In this article, you’ll learn:
Understanding how your credit score is calculated
Your credit score is calculated based on several factors, including:
- Payment history: Your payment history is the most important factor in determining your credit score. This includes whether you make your payments on time and whether you have any late or missed payments.
- Credit utilization: Your credit utilization ratio is the amount of credit you use compared to your available credit. Keep your credit utilization below 30% of your available credit to help maintain a good score.
- Length of credit history: The length of your credit history is a factor in determining your score. Keep old credit accounts open to help maintain a long credit history.
- Types of credit: The credit you have, such as credit cards, loans, or mortgages, can also impact your score. Having a mix of different types of credit can be beneficial.
- New credit: Applying for new credit generates a hard inquiry on your credit report, which can lower your score. Try to limit your applications and space them out over time.
Credit scores are calculated by credit bureaus, such as Experian, Equifax, and TransUnion, using different scoring models. FICO is the most commonly used credit scoring model, which ranges from 300 to 850, with a higher score indicating a better credit profile.
Learn more: How is Your Credit Score Calculated?
What makes your credit score go down?
Unfortunately, several things can cause your credit score to drop. Missing payments, carrying too much debt, and even closing out old accounts can all hurt your credit score. Unauthorized use of credit cards and making inquiries into new accounts can also adversely affect your score. Consistently monitoring and taking action to maintain a good credit rating is a must if you want to ensure that you get access to the best financing offers available.
1. Missing or making a late payment
Missing or making a late payment on your bills is an all-too-easy way to damage your credit score. If you miss just a single payment, the drop can be significant – up to 100 points in some cases. Even if you are only a few days late with your payments, it will still show up on your credit report and hurt your credit score. It’s important to take control of your finances and stay on top of your monthly payments so that you don’t risk damaging your credit score too badly. Remain proactive by getting into the habit of planning out a budget and setting reminders for important payment due dates so you avoid any unnecessary mistakes.
2. Defaulting on a loan
Defaulting on a loan is one of the most damaging things you can do to your personal credit score. This is because lenders view missed and late payments as a sign of poor financial health and reliability. When you default on a loan, it affects your ability to borrow money for other things in the future, such as autos, homes, or renovations. It can also cost you thousands of dollars in additional fees and penalties. Loan defaults can easily cause your credit score to drop 100 points or more quickly. It’s important to prioritize paying off all debts to help boost credit back up. Still, even if loan default hasn’t happened yet, it’s wise to prioritize debt repayment as soon as possible so you don’t have a negative experience later.
3. Paying off a debt
Paying off debt can be a great feeling, but it sometimes comes with an unexpected consequence – your credit score may go down. This can happen when you have a variety of creditors, and paying one off lowers the amount of available credit, giving the impression of overextended credit. You don’t need to worry too much, though. Your score should rebound soon enough if you remain responsible with your other accounts and make payments on time. To prevent any drastic drops in the future, it’s important to plan when thinking about reducing or eliminating outstanding debts. Keep in mind how different payment strategies will affect your score, and understand which approach is best for your situation.
Learn more: Why Do Credit Scores Drop After Paying Off Debt
4. Closing or canceling a credit card
Many people know that having too much credit can damage their credit score, but they may not be aware that closing or canceling a credit card can also have serious repercussions. The amount of available credit decreases when you close or cancel a card, which will, in turn, cause your debt-to-credit ratio to go up and could consequently lower your credit score. Additionally, closing an account with a perfect payment history will remove this data from your report and potentially make you less attractive to future lenders. It’s best to explore all other possibilities before closing a card, as the effects may be more destructive than anticipated.
5. Having a high credit utilization ratio
Having a high credit utilization ratio can be detrimental to your credit score. This figure is calculated by taking the total amount you owe across all your credit accounts and dividing it by the total amount of available credit. When your utilization ratio reaches above 30%, it can cause your score to decrease. As such, it’s important to watch your utilization rate carefully, as having too much debt can cause serious damage to your overall financial health and even make it difficult for you to qualify for loans or get favorable interest rates in the future.
6. Applying for a lot of credit at once leading to hard inquiries
Applying for a lot of credit in a short period can severely affect your credit score. This is because each inquiry into obtaining new credit automatically triggers what’s known as a “hard” inquiry. A hard inquiry is essentially when lenders check your credit to decide whether or not you’re worthy of their offers. Generally, the more hard inquiries within a certain amount of time, the greater chance it has of impacting your credit – resulting in it going in the wrong direction.
Learn more: Do Credit Inquiries Affect Your Credit Score?
7. Not using your new credit card
Avoiding using your new credit card may seem like the right choice to make to keep your credit score secure, but in reality, not taking advantage of this financial tool can damage it. A large part of creating and maintaining a solid credit score is demonstrating that you are responsible for borrowed money. Unfortunately, by not utilizing your available borrowing power, lenders will be significantly less likely to approve loans or other lines of credit when you request them, resulting in a much lower credit score.
8. Not checking your credit report
It’s easy to forget about your credit report since it seems like such an inconsequential part of one’s financial life. Unfortunately, not checking your credit report can impact your credit score negatively. An individual’s credit report includes information from various credit bureaus, which lenders use as part of their assessment process before issuing loans. Having an accurate picture of one’s current credit score is paramount for those looking to borrow money and secure favorable lending terms. Ignoring the importance of periodic reviews means that the individual is not actively taking steps to maintain a healthy credit score which could lead to loan rejections or unfavorable terms.
9. Derogatory marks on your report
Having derogatory marks on your credit report can cause stress and worry. Not only can it hurt one’s chances of getting a loan or renting an apartment, but it can also significantly drop their credit score, making it harder and more expensive to borrow money in the future. Common derogatory marks are late payments, collection accounts, and bankruptcy cases that remain unresolved over time. Even if you had made only one mistake, it could drastically drag down your score. Removing the derogatory mark is essential to improving your credit score. However, this isn’t always simple–many lenders require lots of paperwork and months of waiting before they even consider allowing you to repair your credit history.
10. Erors on your credit report
Errors on your credit report can be costly, as they can quickly drag down your credit score and make it difficult to get approved for a loan or other form of financing. Credit reporting agencies collect all sorts of financial data used to generate your overall credit score, which lenders use when evaluating your application. Thus, errors on your credit report may lead to lenders interpreting you as a higher risk and lowering their scores accordingly. To avoid these problems, it’s important to monitor your credit report – you should check it regularly for discrepancies before they have time to cause any damage. Taking proactive measures like these will help ensure that every transaction you make positively affects your credit score.
11. Identity theft
Identity theft can be a frightening and financially damaging experience, especially if it results in your credit score taking a hit. When an individual misrepresents your identity or takes action based on using your identity without permission, the results can be significant. Your credit score is calculated with various factors, including payment history and debt-to-income levels, in mind. When identity theft occurs, you may not realize the activities taken with your name until it’s too late. This means bills may go unpaid, resulting in negative marks on your credit report and lower scores.
12. Being an authorized user on someone’s bad account
Being an authorized user on an account with a bad credit score can have extremely detrimental effects on your credit score. Because the account is connected to your Social Security Number, in most cases, any negative activity (late payments, collections, judgments, etc.) will pull down your credit standing – and fixing the issue can be challenging. Even if the primary account holder isn’t having financial issues or taking on new debt, you must take steps to protect yourself by staying off of accounts with low credit ratings.
Tips to avoid a credit score drop
Here are some tips to help you avoid a credit score drop:
- Make on-time payments: Payment history is one of the most important factors in determining your credit score. Late or missed payments can have a significant negative impact on your score. Set up automatic payments or reminders to help you make your payments on time.
- Keep your credit utilization low: Your credit utilization ratio is the amount of credit you use compared to your available credit. Keep your credit utilization below 30% of your available credit to help maintain a good score.
- Monitor your credit report: Check your credit report regularly to ensure that the information is accurate and up-to-date. Dispute any errors or inaccuracies that you find.
- Don’t apply for too much credit at once: Applying for credit generates a hard inquiry on your credit report, which can lower your score. Try to limit your applications and space them out over time.
- Keep old credit accounts open: The length of your credit history is a factor in determining your score. Keeping old credit accounts open can help maintain a long credit history and improve your score.
- Avoid collections or bankruptcies: Having accounts in collections or declaring bankruptcy can significantly impact your credit score. Try to work with creditors to resolve any issues before they escalate to collections.
Several factors can cause a credit score to decrease, but some of the most significant factors are:
- Late or missed payments: Payment history is one of the most important factors in determining a credit score. It can hurt your score if you consistently miss payments or pay them late.
- High credit card balances: The amount of debt you have relative to your credit limit, also known as credit utilization, is another major factor in determining your credit score. If you have high credit card balances, it can indicate that you are overextended and may have difficulty making payments.
- Collections and bankruptcies: Having accounts in collections or declaring bankruptcy can have a significant negative impact on your credit score.
- Applying for too much credit: Every time you apply for credit, it generates a hard inquiry on your credit report. Too many hard inquiries in a short period can lower your score.
- Closing credit accounts: Closing a credit account can negatively impact your credit utilization, reducing your available credit. It can also shorten your credit history, which can be a factor in determining your score.
It’s important to note that the specific impact of these factors can vary depending on an individual’s unique credit history and the credit scoring model being used.
There are several reasons why your credit score might drop even when nothing appears to have changed. Some of the common causes include:
- Change in credit report information: It’s possible that something on your credit report changed, such as a late payment being reported or a new account being opened, even if you didn’t initiate any changes. Inaccuracies or errors on your credit report can also negatively impact your score.
- Aging of negative information: Negative information on your credit report, such as a missed payment, may have aged to the point where it’s now having a more significant impact on your score.
- Credit limit changes: If a creditor lowers your credit limit or closes an account, it can increase your credit utilization ratio and decrease your score.
- Change in credit scoring model: Credit scores are calculated using different models, and if your lender or creditor changes the model they use, it could change your score.
If you’re unsure why your credit score has dropped, you can check your credit report and review the details to identify any changes or inaccuracies. You can also contact the credit bureau or your lender to request more information about your score.
The time it takes to recover from a drop in credit score depends on the reason for the drop and your individual credit history. If the drop was caused by a one-time event, such as a late payment or a high credit card balance, you might see an improvement in your score within a few months of resolving the issue.
On the other hand, if the drop was caused by more significant events, such as bankruptcy or foreclosure, it may take several years to fully recover your credit score.
In general, the negative information on your credit report can stay on your report for up to seven years, and bankruptcy can stay on your report for up to 10 years. However, the impact of negative information on your score can lessen over time as you establish a positive credit history by making on-time payments and keeping your credit utilization low.
It’s important to note that rebuilding your credit score takes time and patience. You can start by reviewing your credit report for inaccuracies or errors and disputing them with the credit bureau if necessary. You can also work on making on-time payments, keeping your credit utilization low, and avoiding opening too many new accounts at once. Over time, these positive actions can help improve your credit score.