Why Your Credit Score May Fall Even If You Pay On Time

Making payments on time can help support a healthy credit score, but your score can still decline even when you never miss a due date.

That can be frustrating when you feel you are doing everything correctly and still see a lower number. Here’s a look at the other factors that can affect your credit score and why it may have gone down.

Payment history is only part of the picture

Payment history is the biggest factor in a FICO Score, accounting for 35% of the total. But that still leaves 65% shaped by other categories.

Those other parts include amounts owed, which makes up 30%; length of credit history, at 15%; new credit, at 10%; and credit mix, also at 10%. Even if you pay on time, your score can slip if your credit utilization rises because interest adds to your balance. Taking out a loan, paying one off, or closing an older account can also weigh on your score.

Paying off a mortgage, auto loan or another installment loan is a major milestone, but losing that account can affect your credit mix and the average age of your accounts. In the long run, a small drop is usually not something to worry about.

Why a score can drop without a late payment

Large credit card balances can hurt your score even when every payment is made on time. A credit utilization rate above 30% — for example, carrying a $300 balance on a card with a $1,000 limit — can damage a FICO score, and minimum payments may not bring it below that level.

Hard inquiries can also lower your score temporarily. These happen when you apply for a loan, credit card, apartment rental or another credit product. Lenders use hard checks to review your credit profile and judge whether you can handle monthly payments.

Your score may also fall after opening a new account or closing an older credit card, since both can reduce the average age of your credit history. Mistakes on credit reports are possible too, which is why reviewing your report regularly is important. You can check it for free.

What to do if your score goes down

A lower score is not always a negative sign, especially if you recently paid off a loan. But if you plan to apply for a mortgage, auto loan or similar product, it makes sense to work on improving it. Paying down revolving debt is often the best place to begin. That can reinforce your payment record and improve your credit utilization ratio at the same time.

If your score drops, look over your credit report to see what changed. Then correct any errors and keep up the habits that matter most: pay on time, keep balances under control and avoid applying for new credit too often.