Why Do Credit Scores Decrease?

A drop in your credit score can be frustrating, especially if you’re not sure why it happened. Understanding the reasons behind a credit score decrease is the first step to identifying and fixing the issue. Your credit score is calculated based on several factors, and changes to any of these can impact your score—sometimes significantly. Here are the most common reasons why credit scores decrease and what you can do about it.

1. Missed or Late Payments

Your payment history is the most significant factor in your credit score, accounting for 35%. Missing a payment or paying late can cause an immediate and noticeable drop in your score.

How to fix it:

• Set up reminders or automatic payments to ensure bills are paid on time.
• If you’ve missed a payment, pay it as soon as possible. The longer it goes unpaid, the more damage it can do.

2. Increased Credit Utilization

Credit utilization—how much of your available credit you’re using—accounts for 30% of your credit score. A sudden increase in your credit card balances can make your utilization ratio spike, leading to a lower score.

How to fix it:

• Pay down balances to reduce your credit utilization.
• Aim to keep your utilization below 30%, and lower is even better.

3. Closing Old Credit Accounts

While it might seem like a good idea to close old credit cards you no longer use, doing so can shorten your credit history and reduce your available credit, both of which can negatively affect your score.

How to fix it:

• Keep old accounts open, especially those with no annual fees.
• Use these accounts occasionally to keep them active.

4. Hard Inquiries

Every time you apply for credit, a lender performs a hard inquiry on your credit report. Too many hard inquiries in a short period can signal risk to lenders and lower your score.

How to fix it:

• Be strategic about applying for credit; only apply when necessary.
• Hard inquiries typically impact your score for 12 months, so avoid multiple applications within a short timeframe.

5. Derogatory Marks

Negative items like collections, charge-offs, bankruptcies, or foreclosures can severely damage your credit score. These derogatory marks signal financial distress to lenders.

How to fix it:

• Review your credit report for accuracy. If any negative items are incorrect, dispute them with the credit bureaus.
• Work on settling or paying off any outstanding debts.

6. Changes in Credit Mix

Your credit mix—the variety of credit accounts you have—makes up 10% of your score. If you close or pay off a specific type of account (e.g., an installment loan), it can impact your credit mix.

How to fix it:

• Maintain a balanced mix of revolving credit (e.g., credit cards) and installment loans (e.g., auto loans or mortgages).
• Avoid opening new accounts just to diversify your credit mix.

7. Errors on Your Credit Report

Sometimes, a drop in your credit score isn’t your fault. Errors on your credit report, such as incorrect account balances or accounts that don’t belong to you, can negatively affect your score.

How to fix it:

• Regularly review your credit report for mistakes.
• Dispute any inaccuracies with the credit bureaus. Under the Fair Credit Reporting Act (FCRA), they are required to investigate and correct errors.

8. New Accounts Lowering the Average Age of Credit

Opening new accounts reduces the average age of your credit history, which accounts for 15% of your score. This can temporarily lower your score, even if the new account is managed responsibly.

How to fix it:

• Avoid opening multiple new accounts at once.
• Be patient, as the negative impact will lessen over time as the new account ages.

9. Paying Off a Loan

While paying off debt is a positive financial move, it can sometimes cause a slight dip in your credit score. This happens because paying off an installment loan (e.g., a car loan) reduces the diversity of your credit mix.

How to fix it:

• Don’t be discouraged—paying off loans is good for your overall financial health.
• Focus on maintaining healthy credit habits moving forward.

Final Thoughts

A credit score decrease can be alarming, but it’s often a temporary setback. By understanding the factors that influence your score and taking proactive steps to address them, you can recover quickly and continue building a strong credit profile.

Queen City Credit Clinic specialize in helping individuals understand and improve their credit. If you’ve experienced a drop in your credit score and need guidance on how to bounce back, contact us today. We’re here to help you take control of your financial future!