Things That Can Cause Your Credit Score to Drop

A low credit score is easy to achieve if you avoid demonstrating restraint in the area of personal finance management. The three major credit reporting agencies (TransUnion, Experian and Equifax) determine your credit score on the basis of documented information that indicates your financial conduct. Unwise spending habits are the source of most credit score reductions, as they cause credit reporting agencies to evaluate you as a credit risk.

Late Payments

Topping the list of things that can adversely affect your credit score is late payments. On its website, the credit rating agency Experian explains that "being late on any bill, for any length of time, is a possible indication of future nonpayment of debt and is almost always viewed negatively by lenders." Your trustworthiness is closely related to your reliability. If you fail to meet account payment deadlines, lenders are wary of entrusting large sums of money to your care. Since your credit score is maintained in the interest of informing lenders about your pattern of financial activity, late payments lower your score as they identify you as a likely credit risk.

Large Balances

Hefty balances indicate impulsivity and poor personal finance management. Additionally, if account balances far exceed your anticipated income, lenders feel understandable concern about your ability to repay borrowed sums. Significant balances, spread across multiple accounts, indicate that a person may be living beyond his means.

New Applications

A preponderance of new applications for credit may lower a person's credit score. Statistically speaking, people who apply for multiple new credit lines in a short amount of time represent a credit risk. Fair Isaac's research suggests that such individuals may not be able to manage such accounts responsibly. If your credit history is limited or you do have few accounts, multiple applications in a short amount of time causes your credit score to drop noticeably.

Account Closures

Depending on the number of accounts you have in play and the extent of your utilization of these accounts, credit closures may severely influence your credit score. If you only use one or two credit cards, closing an account alters your credit utilization ratio. This ratio represents the amount of credit you use compared with the amount of credit available for you to use. If you are trying to build a credit history, keep accounts active to provide credit reporting agencies with evidence of your financial behavior. Conversely, if you express a tendency to max out available lines of credit, you are perceived as an unstable spender. Ideally, you should not use more than 30 percent of your available credit across the board.