What Would Cause Your FICO Score to Drop?

Your FICO credit score can drop for several reasons. Fortunately, most are preventable if you effectively manage your money and understand how the credit score formula works. Building a good credit score and history is tough enough when you follow all of the rules. There are some ways that your credit score can decline -- once these are on your report, particularly the more negative items, it makes increasing your score even more difficult.

Too Many Credit Inquiries

Each time you apply for a credit card, open a bank account or even ask for a credit line increase on your credit card, the creditor checks your credit score. These small pings to your account, when excessive, can lower your credit score by a few points. These inquiries drop off fast, but too many at once looks like you are trying too hard to obtain credit.

High or Over-the-Limit Balances

While it is good to use credit in an effort to build your FICO score, using too much credit will harm this number. Credit scores are partially based on your debt utilization ratio -- that is, how much in terms of a percentage of your available credit is being used. It is best to never use more than 50 percent or less of your available credit lines to keep your credit score from going down. Naturally, if you are over the limit, this suggests an above 100 percent debt utilization ratio, and that is frowned upon even more.

Late Payments

A big chunk of your credit score depends on you making timely payments on all of your credit and loan accounts -- as well as your cell phone, TV and electricity bills. One of the fastest ways to see your credit score drop is to not pay your bills on time. When you start falling 30 days behind on a scheduled payment, this behavior will be reported to the credit bureaus.

Reduction or Closing of Credit Lines

Creditors have the right to reduce your available credit line and if this happens, it will make your debt utilization ratio increase in terms of percentage points. Creditors do this to limit their exposure. They will likely do this if they feel you are a higher-risk customer or are not using your available credit line that much. Similarly, closing out the credit line for this reason or just to be done with the account will further reduce your overall available credit and raise your debt utilization ratio.

Charge Offs/Repossession/Foreclosure/Bankruptcy

Sometimes, walking away from a credit card balance, car or home may seem like your only option -- and this activity is happening more and more. While this may be a big relief, having items like these reported on your credit report will significantly lower your score and remain for up to seven years. Filing for bankruptcy is even worse in terms of the long-lasting impact on your credit score.