What Can Lower Your Credit Score?

Your credit score is more than just a number; it’s a reflection of your financial health and can have a huge impact on the opportunities available to you. Why is this so? Well, your credit score is used by lenders and creditors to assess your creditworthiness—or your financial responsibility—and plays a significant role in determining your eligibility for loans, credit cards, as well as renting an apartment or buying a home. 

With all that in mind, it’s no wonder that seeing a drop in your credit score can be a source of worry. But what exactly can lower your credit score? We’re here to break down why credit scores fluctuate, discuss which drops can be good in the long run, and outline how you can increase your score if it isn’t where you want it to be.

To shed light on this topic, we sat down with Analicia Booth, a Community Banker here at Amplify Credit Union, to discuss the various factors that can negatively impact your credit score and how to avoid them.

How Your Credit Score Is Calculated

Before diving into what lowers your credit score, it’s essential to understand how credit scores are calculated.  As Booth explains, “Your credit score is determined by several factors, with payment history being the most important.”

Here’s a look at the breakdown.

• Payment history: Payment history accounts for about 35% of your score.
• Credit utilization: This factor, which refers to the percentage of available credit that you are using at any given time, makes up 30% of your score.
• Length of credit history: Next, the length of your credit history accounts for about 15%, rewarding those who have longer credit histories.
• Recent inquiries: New credit inquiries and the number of recently opened accounts contribute 10% to your score, as frequent applications can be seen as a risk.
• Credit mix: Finally, the types of credit you use—like credit cards, mortgages, and auto loans—make up the final 10%, with a diverse mix of accounts typically being favorable.

“Each of these factors can either positively or negatively impact your score depending on how you manage your credit,” adds Booth.

Factors that Can Lower Your Credit Score

So we understand what makes up your credit score, but what can cause it to drop? The following factors are important to keep in mind.

Late Payment History

Payment history is the most important factor when it comes to your credit score. Late or missed payments—particularly for credit-related payments like credit cards, loans, and lines of credit—can have a significant negative impact, causing your credit score to plummet quickly.

Consistently paying your bills on time is the best way to avoid this.

To mitigate this risk, Booth suggests establishing a system to ensure prompt payments. Set up automatic bill payments or use calendar reminders to stay on top of due dates. Consistently paying your bills on time will demonstrate responsible financial behavior and positively impact your credit score.

As Booth says, “Missing just one payment can hurt your credit score significantly. It’s essential to set up reminders or automate payments to ensure you never miss a due date.”

High Credit Utilization Ratio

Your credit utilization ratio is the next most critical element of your credit score. This ratio measures the amount of credit you’re using compared to your total credit limit. Maxing out your credit card, or even coming close, can hurt your credit score. Ideally, you should aim to keep your credit utilization ratio below 30%. For instance, if you have a credit card with a $10,000 limit, ideally you should try to keep your balance on that card below $3,000.

Booth emphasizes, “Maintaining a low credit utilization ratio is key to a healthy credit score. Try to use only a small portion of your available credit.”

Note: Credit utilization ratio is often confused with debt-to-income (DTI) ratio— but these are not the same numbers! Debt-to-income ratio, which shows how much of your total income is obligated to debts, is an important factor when taking out a loan but is not a factor in credit score calculations.

Closing Old Accounts

The length of your credit history also plays a not insignificant role in your credit score. Lenders like to see a long history of good financial decisions on your part, and as such, closing old accounts—especially those with a long credit history—can hurt your credit score.  While there may be valid reasons for closing an account, such as avoiding high fees or managing excessive debt, if you need to close an account, consider closing newer accounts first while keeping older, established accounts open to maintain a positive credit history. 

It’s also important to avoid closing accounts inadvertently, as some accounts may actually close automatically if they’re inactive. For instance, if you don’t use your Discover card often enough, they might send you notice of impending closure. It’s important to keep as many of your credit card accounts open as possible, because it also gives you a more favorable credit utilization ratio. 

“It’s a good idea to keep your oldest accounts open, even if you’re not using them frequently. Putting a single recurring charge that is automatically paid off each month is a great way to keep a card open without having to keep it in your wallet. This helps build a longer credit history,” suggests Booth.

Opening New Accounts

On the flip side, opening several new accounts in a short period of time can be seen as risky behavior, which can also have a negative impact. When you apply for new credit, it triggers a hard inquiry on your credit report, which can temporarily lower your credit score.

At times, triggering a hard inquiry into your credit is necessary. For instance, if you’re shopping for a loan or credit card, the lender will want to take a look at your credit. But to minimize any negative impact to your credit score, Booth suggests trying to limit your applications to a short period.

“This allows credit scoring models to recognize that you’re seeking the best terms for a single loan, rather than multiple loans. And it’s best to only open new lines of credit when necessary and be cautious about taking on excessive debt.”

Bankruptcy and Foreclosure

Both bankruptcy and foreclosure have a devastating effect on your credit score. These actions remain on your credit report for seven to ten years, making it extremely difficult to obtain new credit. Even after that period, you may still face higher interest rates and stricter terms.

However, it’s important to note that your credit score can gradually recover after these events, especially with responsible financial management. As Booth notes, “Rebuilding credit after bankruptcy or foreclosure requires a strategic approach. You can start by establishing a budget and maintaining a record of timely payments for any remaining debts you have. You might also consider applying for a secured credit card or a credit builder loan to demonstrate responsible credit behavior, and over time, these positive actions can help rebuild your credit score.”

Inaccuracies on Your Credit Report

Finally, inaccurate information on your credit report can negatively impact your credit score. But the good news is, this factor is often one of the easiest to fix, although it does require a bit of vigilance on your part. Booth says, “It’s crucial to regularly review your credit report and report any errors or discrepancies to the credit bureaus.” 

Such inaccuracies might include accounts that don’t belong to you, incorrect payment statuses, or outdated information. Disputing these inaccuracies and having them corrected can help improve your credit score.

Final Thoughts

Maintaining a good credit score is about more than just paying your bills on time. It requires a comprehensive understanding of the factors that can lower your credit score and proactive management of your finances.

Booth concludes, “Your credit score is a reflection of your financial habits. By understanding what lowers your credit score, you can take the necessary steps to protect it and ensure you’re in the best possible position when you do need to borrow.”

Wondering where you stand? Start by checking your credit report. Consumers are entitled to one free credit report annually, which can be requested here.

If you have any concerns about your credit score or need personalized advice, don’t hesitate to reach out to us at Amplify Credit Union. Our community bankers are here to help you navigate your financial journey.