The Surprising Things That Drop Credit Scores

Craig Donofrio

Obtaining good credit seems straightforward: You borrow, you pay back on time, viola! But while paying your bills on time and keeping your debts low are the two biggest factors to your credit score, they aren’t the only factors. A lot of your seemingly no-big-deal financial moves—everything from when you opened your first credit card to how much of your credit you’re currently using to how many times you’ve applied for a store card to score a discount—are used in credit scoring’s mysterious, complicated algorithms.

Everyone’s credit history is unique, but there are some moves that can trip anyone up. Check out some of these unusual things that can ding your score, as well a few that actually won’t subtract from your FICO number.

Closing an account

Closing a credit account you haven’t used in months (or years) sounds logical, but you might want to keep it open. Even if you’re paying off any outstanding balance immediately, shutting down the account may lower your score in a couple of different ways.

First, there’s the credit utilization factor. Credit utilization is essentially the ratio of your debts to the amount of available credit. Utilization accounts for 30 percent of your total credit score, so it’s a pretty big deal. When you close an account, “you lose the value of the unused credit limit in the debt-to-limit ratio metrics,” explains John Ulzheimer, an expert who has worked at FICO and the credit reporting agency Equifax. In other words, closing down a line of credit increases your debt in relation to your available credit.

Let’s say you have two credit cards: Credit Card 1 with a $10,000 limit and $3,000 balance and Credit Card 2 with a $5,000 limit and $2,200 balance. Overall, you’re using $5,200 out of a $15,000 credit limit, about a 35 percent utilization rate.

If you pay off and close Credit Card 1, you drop your credit limit to just $5,000–the limit on Credit Card 2. Since you still have $2,200 on Credit Card 2, your total utilization rate is now 44 percent.

However, if you paid off and closed Credit Card 2 instead, you would improve your credit utilization rate. You’d have a $10,000 limit, and the $3,000 balance on the card would translate to a 30 percent utilization rate—the maximum experts recommend for good credit scores.

Then there’s the age factor. Fifteen percent of your FICO credit score is based on the length of your credit history. Generally, conventional wisdom says that if you close an older account, your length of credit history—and thus, your credit score—will drop immediately. Thankfully, Ulzheimer tells us that an immediate drop won’t actually happen, though closing an account can still impact your credit score in the future.

Say tomorrow you close a 10-year-old credit account. Rather than drop off immediately, shortening your credit history, that account will remain and continue to age on your credit history for another seven to 10 years.

How long a closed account sticks around depends on how it was handled while active. An account with negative information remains on your credit report for seven years from the date of first delinquency. A positive closed account—one without a history of late payments—will remain on your account for 10 years after the date of closure or last activity, depending on the credit bureau.

Only after the seven- or 10-year mark will an account fall off your credit report, and that’s when the average age of credit can be affected. When the account falls off, your credit history will adjust to your next-oldest account. If your next oldest account is also several years old, your credit history length probably won’t see too much of an impact. But if your other accounts have only been open a year or two, you’ll likely see a drop in your credit score.

New accounts, same lender

You take advantage of a credit card provider offering a better deal on another product, or you refinance from a variable rate to a fixed rate with your loan servicer—these sound like solid financial moves, right?

Well, maybe. While it’s common for financial services companies to make these kinds of offers to long-term customers, making the switch can take a bite out of your credit score.

Consider the experience of one young professional, who asked to remain anonymous. After she refinanced her $50,000 student loan bill. Initially, she opted for a 20-year variable rate. Her regular payments on that debt helped her build up an impressive credit score.

“My score in March was 799. I was so happy with myself, and I was checking every week,” she says.

But as the variable rates on her student loans gradually increased, she decided to refinance again for a fixed-rate with a shorter repayment period. And then something strange happened. Her FICO score dropped 22 points. She hadn’t done anything differently financially, except refinance her student loans with the same servicer she’d used from the original refi.

So, what happened?

The student loan refinancer likely did a hard credit pull (a type of inquiry that counts against your credit score), but Beverly Harzog, a credit expert and author of The Debt Escape Plan, says a hard pull could only “drop your credit score from two to five points” per inquiry.

“Losing 20 points is a lot, so this might be due to other factors as well,” Harzog says.

According to NerdWallet, if a lender, your credit card provider for example, decides to modify your account —say your card was stolen and you needed a new account number, or you have a store card switching from Mastercard to Visa—the lender handles all that on the backend, without impacting you and your credit score. However, if you initiate a change—say by refinancing your student loans—that will likely be treated as a new account. And anytime you open a new account, it shortens your credit history length, in turn lowering your score.

High scores can mean big drops

That score you’ve worked so hard to build can drop pretty easily if you slip up.

When your credit score is high and you make a mistake, say paying a credit card bill late by at least 30-days, the ding you take will be much larger than the ding someone with an average-to-subprime credit score would suffer.

As Steve Ely of, told “The old [adage] of ‘the bigger they are, the harder they fall’ applies to credit scores too. … If you have a really high FICO score you’ll take a bigger hit for a late payment than someone with a lower FICO score.”

While we’re not suggesting you shouldn’t master the prime score range, be ever vigilant once you do reach the top.

To pay, or not to pay, an old debt

The most simplified personal finance advice says debts—like credit card balances and personal loans—are bad for your credit score. While paying them off is solid advice, older debts on closed accounts can be tricky, and much internet advice warns against paying off old debts on the mistaken belief that contacting those creditors will restart the seven-year reporting clock.

Ulzheimer, the credit expert who worked at FICO, says that’s not what you should worry about.

“As far as credit reporting goes nothing, absolutely nothing, restarts or extends the seven-year clock,” says Ulzheimer. “Paying off old debts will either help your credit scores or be neutral.”

You’re unlikely to see much of a bump from paying off older closed debts, which impact your scores less than recent debts. However, paying on a debt or contacting a creditor without paying in full can have some fairly serious consequences.

Partially paying down an old debt can restart the clock on the statute of limitations—the timeframe when a company can sue you. Debts that have successfully passed your state’s statute of limitations are known as time-barred debts. If you make a payment on a debt that is approaching time-barred status, you may reset the clock. If you don’t repay the debt in full, the creditor can now sue before the new statute of limitations runs out. If you’re taken to court, the lawsuit won’t be reported to the credit bureaus, but they will take into consideration any judgment against you. Not only will that cause a steep drop in your credit score, you’ll also have to pay the judgment amount. Make sure you know just how old that debt is before you try to arrange a payment plan. You may just want to wait until you can pay it off in full.

Blurry lines between personal and business

If you’re a small business owner or self-employed, the lines between your business finances and your personal finances can get blurry. Business owners need a business account to keep their personal funds separate from company money. While the owner’s personal financial moves are tracked by a FICO credit score, the business’ financial history is also tracked through a separate scoring system—commonly the Paydex score, which ranges from 1 to 100 and tracks things like timely payments.

Usually, these two scores are kept separate, but there are some instances where using a business account can hurt your personal credit scores. For example, “if you open that business account with a personal guarantee and default on that line of credit, it will hurt your personal credit score,” says Irene Prewitt, a small business owner who runs Hannah Financial, a credit restoration business in Cleveland, Ohio.

Several banks also report business credit card activity directly to credit bureaus, which can be good if you’re making on time payments and keeping debt low or bad if you’re not. According to NerdWallet, Capital One and Discover report all activity to the big three consumer credit bureaus: Equifax, Experian, and TransUnion. American Express only reports negative information, while Chase and U.S. Bank only report instances of serious delinquency. Citibank, Bank of America, BBVA Compass, and Wells Fargo don’t report business credit activity to the consumer bureaus.

Not all doom and gloom

Fortunately, it isn’t all doom and gloom with your credit scores. Some things never hurt your scores. For example, “soft inquires,” like when a potential employer or a utility company pulls your credit scores, won’t ding you. You also never get dinged for pulling your own score.

And of course, it helps to remember that all things get better with time. Be it a mistake or a “what the hell happened” mystery, the credit drop is always worst in the beginning. As your credit history ages, the ding will have less and less influence on your scores. So while you may not be able to prevent every little credit hit, at least you know it won’t hurt for long.