What Makes Your FICO Score Drop?

Your credit score impacts everything from a loan approval to your chances of renting an apartment. It can even help determine whether an employer will hire you or if an insurer will issue you a policy. It's important to understand how FICO calculates your score and what occurrences can make it drop.

Identification

According to MyFico, the information in your credit report determines your FICO credit score. This score ranges from 300 to 850 and changes as the data in your report changes. Several factors help determine your score -- 35 percent of the score reflects how well you pay your bills, 30 percent is based on the amount of debt you have, 15 percent reflects the average length of your credit accounts, 10 percent is determined by the amount of new credit you have, and the last 10 percent reflects the mix of credit types you have.

Effects

A change in one or more areas of your credit report can cause your score to drop. The two largest factors have the most effect. For example, late payments on your account will lower your score. The later the payment, the more damage it does to your score. This one area alone accounts for 35 percent of your score. According to MyFico, 30 percent of your score reflects your credit utilization ratio, which is the amount of debt you have versus the amount of credit you have. The more available credit, the lower this ratio and the higher your score. Maxing out a credit card will raise this ratio because you'll have more debt than available credit; hence, it will cause your score to drop. How much your score drops depends upon the other factors in your report.

Considerations

Efforts to raise your score can actually backfire if you're not careful. When calculating your score, FICO considers your credit mix, such as credit cards, mortgages and loans. This mix accounts for 10 percent of your score; however, FICO warns against obtaining new credit to improve your credit mix. Although new credit accounts for 10 percent of your score, when you open a new credit account, this shortens the average length of your credit history, which makes up 15 percent of the score. FICO rewards long credit histories since it shows stability. A shorter credit history will lower your score. According to MyFico, only apply for new credit if you really need it, not to improve your score.

Misconceptions

Even if your have a low FICO score, it won't remain there forever for two reasons. First, since your score isn't a stagnate number, it will improve as the data in your report improves. Secondly, under the Fair Credit Reporting Act, negative account information can only remain on a credit report for up to seven years. If something on a report is beyond this statue of limitations, the FCRA gives you the right to dispute it with the credit bureau and have it removed. File a dispute online at the bureau's website, by phone or mail.

Warning

Beware of companies that promise to repair your credit or increase your FICO score. This could be a scam, according to the Federal Trade Commission. Under the FCRA, credit bureaus are not required to remove accurate negative data from a credit report that falls within the statue of limitations. If there's a mistake on your report, the FCRA gives you the right to correct errors on that report yourself for free.