Because your credit score affects your ability to obtain credit and the interest rate you will pay on new credit accounts, it is important to keep your credit score as high as possible. A wide variety of events can damage your credit score, so you should try to avoid these if at all possible, especially when you are planning to apply for new credit soon.
If a lender reports that you have missed a payment and are now 30 days late, this immediately causes your credit score to drop. The effect of the missed payment depends on where your score was to begin. Fair Isaac Corp., known as FICO, estimates that someone with a score of 780 will see a drop of 90 to 110 points for just one 30-day missed payment. On the other hand, someone with a score of 680 before the missed payment should see a drop of only 60 to 80 points. Payments that are more than 30 days late affect scores even more.
If you have worked out an agreement with a lender to settle an account, meaning that you have paid less than was due and the lender erased the debt, this will cause your credit score to decrease. Settling a credit card account is generally not as damaging as a short sale or foreclosure, which typically involves more of a loss for the lender. The worst kind of settlement is bankruptcy, which typically involves multiple accounts and adds a negative public record to your credit report. According to FICO, filing bankruptcy could bring your score down more than 200 points.
Increased Credit Utilization
Part of your credit score considers your utilization ratio, which compares each credit card balance to the card's limit. When your utilization ratio increases, your score could go down. According to FICO, using more than half of your credit line can hurt your credit score. For example, if you have only one credit card with a credit limit of $3,000 and a balance of $1,000, your utilization ratio is 33 percent. However, if you make a large purchase on the card and increase your balance to $2,000, your utilization will be 67 percent, which can hurt your score. Another action that could cause your ratio to increase is if your credit card company lowers your credit limit. For example, if the company decreases your limit from $3,000 to $1,800, your $1,000 balance will now be using 56 percent of your available credit.
Whenever you apply for a new credit card or loan, the lender pulls your credit report, which generates a credit inquiry. Each inquiry does not have much of a negative effect on your score, but multiple inquiries can add up and make you appear to be a riskier borrower. In addition, whenever you actually open a new account, this new account lowers your credit score as well. The negative effects of new credit diminish over time.
- MyFICO: Not-So-Obvious Causes for a Dropping FICO Score
- MyFICO: Credit Missteps -- How Their Effect on FICO Scores Vary
- Federal Citizen Information Center: Your Credit Scores
- My FICO: What is the Best Way to Manage My Growing Credit Card Debt?
- myFICO. "What's in my FICO Scores?" Accessed Feb. 29, 2020.
- Experian. "How Long It Takes for a $0 Balance to Show on Report." Accessed Feb. 29, 2020.
- Equifax. "Collection Accounts and Your Credit Score." Accessed Feb. 29, 2020.
- TransUnion. "FICO Score 9," Page 2. Accessed Feb. 29, 2020.
- myFICO. "Amounts Owed." Accessed Feb. 29, 2020.
- Experian. "Closing a Credit Card Can Hurt Your Credit Score." Accessed Feb. 29, 2020.