1) Late or Missed Payments: Payment history is the most significant factor affecting your credit score, accounting for about 35% of the total score. Late or missed payments on credit cards, loans, or other bills can cause a substantial drop in your credit score. Even a single late payment can have a significant negative impact, especially if it is reported recently. Consistently paying bills on time is essential for maintaining a high credit score. If you miss a payment, it’s important to get current as soon as possible and stay current to minimize the damage to your score.
2) High Credit Utilization Ratio: Your credit utilization ratio, which is the amount of credit you're using compared to your total credit limit, makes up about 30% of your credit score. If your credit card balances are high relative to your credit limits, your score can drop. A high credit utilization ratio indicates to lenders that you may be overextended financially and pose a higher risk. It’s generally recommended to keep your utilization below 30%, but lower is always better. Paying down credit card balances and managing your spending can help improve your utilization ratio and protect your credit score.
3) New Credit Applications: Applying for new credit can also cause your score to drop. Each time you apply for a credit card, loan, or other credit product, the lender performs a hard inquiry on your credit report. These inquiries can lower your score slightly and can accumulate if you apply for multiple new accounts in a short period. Additionally, opening new accounts can reduce the average age of your credit accounts, which can also negatively impact your score. It’s wise to limit new credit applications and only apply when necessary to avoid unnecessary hard inquiries and maintain a stable credit history.
4) Closing Old Accounts: Closing old credit accounts can harm your credit score in several ways. First, it can reduce your total available credit, which can increase your credit utilization ratio if you have balances on other cards. Second, it can shorten the average age of your credit accounts, which is a factor in your credit score. A longer credit history is generally better, as it shows lenders that you have a track record of managing credit responsibly. To maintain a high score, it’s often best to keep old accounts open, even if you don’t use them frequently, to preserve your credit history length and available credit.
5) Negative Public Records: Negative public records such as bankruptcies, tax liens, and civil judgments can severely damage your credit score. These records indicate significant financial difficulties and are considered major red flags by lenders. Bankruptcies, in particular, can stay on your credit report for up to 10 years, causing long-term damage to your score. While other negative public records can stay on your report for seven years. Avoiding these situations by managing your finances carefully and seeking help if you’re facing financial difficulties can help protect your credit score from severe drops.