7 Common Actions that Can Hurt Your Credit Score

Credit scores are all about giving lenders and businesses a read on your track record in making smart spending and borrowing choices. For example, a low credit score signifies a high risk, so financial mistakes confirm what is already known. But if you have a high credit score and make a habit out of late payments, it’s considered bigger news because it’s out of character and may signal trouble ahead.¹

An example from FICO, the credit scoring system most often used by businesses, estimates that someone with a great credit score could see a drop of 60 to 80 points if they were 30 days late with one payment. Someone with a less-than-great score might see their score drop 25 to 45 points for the same slipup.²

You can stay on top of your credit standing with American Express^® MyCredit Guide. Once you’ve enrolled, you can log in to check your FICO^® Score, explore your Experian^® credit report, and take advantage of tools like FICO^® Score Planner and FICO^® Score Simulator to gain credit insights. (FICO is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.)

Alas, there are more than a few actions that can make your credit score go down.

If you are just a few days late, your credit score probably won’t decrease. It’s when you fall more than 30 days behind that your score will take a dip. The faster you get back on schedule, the better. The point drop for being 90 days behind on a payment is more severe than the decline you would see for being 30 days late. It’s best to avoid late payments altogether, as your payment record is the single most important variable in computing your FICO credit score, accounting for 35% of your score.

Another variable all scoring models care about is your credit utilization ratio, which makes up 30% of your FICO credit score. To find your credit utilization ratio, add up the maximum credit limits on all your credit cards and compare that to your outstanding balances on those cards. Folks with excellent credit scores typically have a credit utilization rate below 30%. 

Your average credit account history determines 15% of your FICO score. Cancel a card with a very long history and your average credit history will decrease, which could pull down your credit score. But that’s not all. Canceling a card will also increase your credit utilization ratio because you’ll decrease your total available credit limit. 

If your credit card issuer reduces your credit limit – this sometimes can happen during economic downturns when unemployment rises – your credit utilization will rise, which, you guessed it, can impact your credit score. Increasing your credit limit without running up bigger balances, on the other hand, won’t have much impact. However, some card issuers will run a hard credit check before raising your credit limit, which will typically cause a small, temporary dip in your FICO credit score.³

This one is tricky. In the short term, you may see your credit score drop a bit when you open a new credit account. It can happen for a few reasons:

• Every time you apply for a new credit card or loan, creditors will make a hard inquiry.
• If you have yet to establish a long credit history, a new card will cause that average to fall a bit, which can shave some points off your score.
• Adding the new debt of a personal loan can cause your credit score to dip.

However, a hard inquiry affects your score only temporarily. And in the long term, if you continually make on-time payments, you can typically expect to see your credit score start climbing within a year. Finally, if the personal loan is manageable and you can pay it off over a reasonable period of time, increasing your mix of credit types can actually boost your credit score.

Defaulted loans, accounts in collections, bankruptcy, home foreclosures, and repossessed cars can all lead to “derogatory” marks on your credit report, none of which will help your score. That said, the events that typically lead to those unfortunate outcomes – such as missed payments or maxed-out credit cards – likely will have already caused a major drop in your credit score.

Most of these setbacks will stay on your credit report for up to seven years or more, even if you pay off the account. The good news is, that impact on your credit score will decrease with time as long as you take the steps to rebuild your credit score.

It seems counterintuitive, but here’s the deal: 10% of your FICO credit score is based on your mix of credit cards and loan types. When you finally pay off a loan, it decreases your credit mix, which can in turn ding your credit score. But that shouldn’t be a reason to avoid paying off loans. Common financial wisdom says it’s better to eliminate debt than fret over a small, temporary dip in your credit score. For more on eliminating debt, read “What is Debt Free Living?”

Remember that anytime your credit score falls, it’s not permanent damage. If you’ve already built up good credit, you likely know the financial habits that will help improve your credit score. So if a financial mistake happens, rest easy. There may not be a magic formula for how long it will take to get your score back to where it was, but with each month that passes, the impact of a credit blunder on your credit score will recede – as long as you manage your credit responsibly.