What Can Lower Your Credit Score?

Your credit score is a crucial element of your financial well-being. It influences your ability to secure loans, rent an apartment, and even get certain jobs. Maintaining a good credit score requires understanding the factors that impact it. This guide will delve into the various actions and circumstances that can negatively affect your credit score, providing you with the knowledge to avoid common pitfalls and protect your financial future.

Understanding the Credit Score Basics

Before diving into the specifics of what can lower your credit score, it's important to understand the basic components that make up your score. While the exact formulas used by credit bureaus like Experian, Equifax, and TransUnion differ slightly, the following factors generally contribute significantly to your credit score:

• Payment History (35%): This is the most crucial factor. Paying your bills on time, every time, is paramount.
• Amounts Owed (30%): Also known as credit utilization, this measures the amount of credit you're using compared to your total available credit.
• Length of Credit History (15%): A longer credit history generally indicates a more stable credit profile.
• Credit Mix (10%): Having a variety of credit accounts (e.g., credit cards, installment loans) can be beneficial, but not essential.
• New Credit (10%): Opening too many new accounts in a short period can lower your score.

Key Factors That Can Lower Your Credit Score

Now, let's explore the specific actions and events that can negatively impact each of these categories, leading to a lower credit score.

1. Late Payments: The Biggest Culprit

Payment history accounts for the largest portion of your credit score. Late payments are one of the most damaging things you can do. Even a single late payment can have a significant negative impact, especially if you have a thin credit file (a short credit history with few accounts).

• How late is "late"? Typically, a payment is considered late when it's 30 days past the due date.
• Impact on your score: The later the payment, the more significant the negative impact. Payments 60, 90, or 120 days late will severely damage your score.
• Public Records: Accounts sent to collection agencies will also show up on your credit report as a serious negative mark.
• Mitigation: Set up automatic payments, use calendar reminders, and ensure you have sufficient funds to cover your bills each month. Contact creditors immediately if you anticipate a problem.

2. High Credit Utilization: Maxing Out Your Cards

Credit utilization ratio is the amount of credit you're using compared to your total available credit. For example, if you have a credit card with a $10,000 limit and a balance of $5,000, your credit utilization is 50%. Lenders generally prefer a low credit utilization ratio. A high ratio signals that you may be overextended and struggling to manage your debt.

• Ideal utilization: Aim to keep your credit utilization below 30%. Some experts even recommend aiming for below 10%.
• Individual vs. Aggregate: It's important to consider both your individual credit card utilization and your overall utilization across all your cards.
• Strategies to lower utilization: Pay down your balances aggressively, request a credit limit increase (without increasing your spending), or open a new credit card (responsibly!).
• The Dangers of Maxing Out: Maxing out one or more credit cards can significantly lower your score, even if you always pay on time.

3. Bankruptcy: A Major Setback

Filing for bankruptcy is a serious financial decision with significant consequences for your credit score. It's generally considered a last resort option when dealing with overwhelming debt.

• Types of Bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization) are the most common types.
• Impact on your score: Bankruptcy can remain on your credit report for 7-10 years, significantly impacting your ability to get credit.
• Long-term effects: While bankruptcy can provide debt relief, it will make it more difficult to obtain loans, mortgages, and other forms of credit for many years.
• Rebuilding Credit After Bankruptcy: While challenging, rebuilding your credit after bankruptcy is possible. Secured credit cards and responsible financial behavior are key.

4. Public Records and Collections: Unresolved Debts

Public records like judgments and tax liens, along with accounts sent to collections, are significant negative marks on your credit report.

• Judgments: A judgment is a court order requiring you to pay a debt.
• Tax Liens: A tax lien is a claim by the government against your property for unpaid taxes.
• Collection Accounts: When you fail to pay a debt, the creditor may sell the debt to a collection agency. These accounts appear on your credit report and significantly lower your score.
• Addressing Public Records and Collections: It's crucial to address these issues promptly. Negotiate with the creditor or collection agency to pay off the debt and potentially have the record removed from your credit report.

5. Too Many Credit Inquiries: Shopping for Credit Excessively

Each time you apply for credit, a credit inquiry is generated on your credit report. While a single inquiry usually has a minimal impact, applying for multiple credit accounts in a short period can signal to lenders that you're a higher-risk borrower.

• Hard vs. Soft Inquiries: Hard inquiries occur when you apply for credit. Soft inquiries occur when you check your own credit report or when lenders pre-approve you for offers. Only hard inquiries affect your score.
• Rate Shopping: Rate shopping for a mortgage or auto loan within a short window (typically 14-45 days) is generally treated as a single inquiry.
• Minimize Inquiries: Avoid applying for multiple credit cards or loans unless you absolutely need them.

6. Closing Old Credit Accounts: Reducing Available Credit

While it might seem counterintuitive, closing old credit accounts, especially those with long credit histories and high credit limits, can negatively impact your credit score. This is because it reduces your overall available credit and can increase your credit utilization ratio.

• Impact on Credit Utilization: Closing an account with a significant credit limit can significantly increase your utilization if you carry balances on other cards.
• Length of Credit History: Closing an old account removes it from your credit history, potentially shortening your average account age.
• Exceptions: If you're paying high annual fees on a credit card you rarely use, closing it might be a worthwhile trade-off, despite the potential negative impact.
• Consider Alternatives: Consider keeping the account open and making small purchases occasionally to keep it active.

7. Errors on Your Credit Report: Inaccurate Information

Errors on your credit report can negatively impact your score. It's crucial to regularly review your credit report from all three major credit bureaus (Experian, Equifax, and TransUnion) to identify and dispute any inaccuracies.

• Types of Errors: Common errors include incorrect account balances, late payment notations that are inaccurate, accounts that don't belong to you, and incorrect personal information.
• Disputing Errors: You have the right to dispute any inaccurate information on your credit report.
• The Dispute Process: Contact the credit bureau and the creditor that reported the information. Provide documentation to support your claim.
• Free Credit Reports: You are entitled to one free credit report per year from each of the three major credit bureaus through AnnualCreditReport.com.

8. Co-Signing a Loan: Taking on Responsibility for Others' Debt

Co-signing a loan means you're guaranteeing the debt for someone else. If the borrower fails to make payments, you're responsible for the debt. This can significantly impact your credit score if the borrower defaults or makes late payments.

• Full Responsibility: Remember, co-signing a loan puts you on the hook for the entire debt.
• Impact of Late Payments: If the borrower makes late payments, it will negatively affect both their credit score and yours.
• Potential for Default: If the borrower defaults on the loan, you'll be responsible for repaying the entire balance, which can severely damage your credit score.
• Consider the Risks Carefully: Only co-sign a loan if you're confident the borrower will repay the debt responsibly.

9. Identity Theft: A Threat to Your Credit

Identity theft can wreak havoc on your credit score. If a thief opens fraudulent accounts or makes unauthorized purchases in your name, it can lead to late payments, collection accounts, and other negative marks on your credit report.

• Monitoring Your Credit Report: Regularly monitor your credit report for any suspicious activity.
• Setting Up Fraud Alerts: Consider placing a fraud alert on your credit report, which requires creditors to take extra steps to verify your identity before opening new accounts.
• Freezing Your Credit: A credit freeze prevents anyone from accessing your credit report, making it difficult for thieves to open new accounts in your name.
• Reporting Identity Theft: If you suspect identity theft, report it to the Federal Trade Commission (FTC) and file a police report.

10. Not Using Credit at All: A Lack of Credit History

While it might seem like avoiding credit altogether would be beneficial, it can actually make it difficult to build a good credit score. Lenders need to see a history of responsible credit use before they're willing to extend you credit.

• Building a Credit History: Using credit cards responsibly and paying your bills on time is essential for building a solid credit history.
• Secured Credit Cards: If you have no credit history, a secured credit card can be a good way to start. These cards require you to deposit a security deposit, which typically serves as your credit limit.
• Credit-Builder Loans: These loans are specifically designed to help people build credit. You make fixed monthly payments, and the lender reports your payment history to the credit bureaus.