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why has my credit score gone down
why has my credit score gone down

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Why Has My Credit Score Gone Down? Reasons & Fixes

Credit reference agencies use specific credit scoring models to determine your credit rating, so there are several factors that can cause your score to drop.
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Credit score drops are typically due to specific factors that result in a lower credit rating.

Credit reference agencies use specific credit scoring models to determine your credit rating, so if you want to know why your credit score has gone down, you need to understand how credit scores are calculated. 

By far, the most significant factor that will affect your credit score is your payment and credit history. A late or missed payment will cause your overall credit score to drop.

Another key factor is your credit utilisation - the amount of your available credit limit that you're currently using on your credit card, along with the length of your credit history.

However, some other factors can result in a drop in your credit rating, including:

  • Taking out new credit

  • Closed an old account

  • Incorrect information on your credit report

  • A reduced credit limit

  • You've paid off a loan

  • Derogatory marks

  • Fraudulent applications

With this in mind, let's take a closer look at the factors behind a credit score drop and how you can increase your credit score.

Missing or late payments

Your payment history is the main factor when it comes to calculating your credit score. If you fail to make your payments every month on time, this will affect your credit profile negatively.

Late payments impact your credit score

If you have a payment that is late your credit card issues will likely report to at least one of the three major credit bureaus.

This can result in a drop in your credit score and if you do not make these payments the debt may be sent to a debt collection agency. 

It's therefore essential to make sure that you pay all your credit card bills, loan repayments and other financial obligations on time. The later you pay, the more your credit score will drop.

Credit scores are severely impacted if an account goes into arrears

One missed payment is a problem, but multiple missed payments on your debts are a severe issue that will definitely affect your score.

This will cause your account to be in arrears, and the lender will end your agreement with them. They will then usually take action to collect the money you owe.

If information of this type is added to your credit report by your lender, your credit score may see a significant drop.

Your credit utilisation ratio

Credit utilisation is a major factor in credit reports. Credit utilisation refers to the amount of available credit you have out of your total credit limit across all your credit accounts.

When you take out a credit card, your lender will give you a credit limit. While it's technically possible to spend up to that limit, it's best to avoid this. If you use too high a percentage of your credit card limit, this could negatively affect your credit score.

A high credit utilisation rate might indicate to lenders that you may find paying off a loan or new credit card debts difficult. This is why you should keep your credit usage ratio under 30% of your credit card's limit.

You've taken out new credit

If you apply for a new credit card or loan, you may be shocked if you check your credit report to see that your score has gone down.

There are two reasons why your credit score might drop in this scenario:

Whenever you apply for any type of credit, lenders carry out a hard search on your credit report. All hard inquiries are recorded on your credit report and can have a negative effect on your credit scores.

This is especially likely if you have made lots of credit applications within a short time. This is because lenders may believe you're desperate for credit, which could deter them from lending to you.

Whenever you take out a credit card or loan, your credit accounts' average age will decrease. As a result, your credit score could go down since lenders often prefer credit accounts to be older.

This indicates stability and helps to prove to lenders that you are a lower credit risk and a reliable borrower. Over time, your accounts will get older, resulting in credit scores going back up again as long as your payments are paid in full and on time every month.

You've settled a financial agreement in court

Being issued with an Individual Voluntary Arrangement (IVA) or a CCJ (County Court Judgement) will result in a dropped score.

Of course, it goes without saying that if you're declared legally bankrupt, this too will be harmful as it tells prospective lenders you've failed to make payments on your debt before, and you may therefore be a risk to lend money to now.

You've closed an old account

If you recently closed down an old bank account, your credit score can take a hit. This is because closing an old account means that the overall age of your accounts has dropped. 

Closing an old credit account also means that the available credit you have is reduced, which could also potentially push your credit utilisation over the desired limit and lead to a drop in your credit rating. 

Fraudulent applications

Identity theft remains a huge problem and the number of people in the UK affected by identity fraud rose by more than a third during the first half of 2022 compared to the year before.

This amounts to more than 136,000 recorded cases.

Identity theft can really hit your credit score hard so make sure you regularly review your credit record and act quickly when you suspect you've been a victim of identity fraud.

Incorrect or outdated details

It's important to make sure that your contact details and address are up to date at all times. If your information is outdated, it might have a negative impact on your credit score.

A change in your electoral roll details

It's important to be registered on the Electoral Roll with your current address if you want to ensure a good credit score. This is because it proves to any potential lender that you can easily be contacted and have a stable residence.

It makes it far more likely that you'll be accepted for credit.

However, there's another factor at play here. The length of time that you've been on the electoral roll is also important. If you've only recently joined the electoral roll at your current address, this could cause a dip in your score.

The longer you've been registered to vote at any given address, the better your score will be. This means if you've recently moved home or even changed your name, you could see a change in your rating. This is because it causes a break in the electoral roll data available to CRAs.

Don't worry too much if this is the cause of your score being slightly lower than usual. Any potential lender can still see your historical data, so they will be aware of your recent move.

This shouldn't affect any application you make for credit negatively. Nevertheless, in terms of your actual credit score that you see when you carry out a check, the longer your stretch of unbroken electoral roll data, the better your score will be.

You change addresses frequently

Lenders often see frequent changes of address as an indicator of an unstable position, and this is bad news to them since stability could help them see you're likely to pay your debts.

Even if your bills are paid regularly, a flurry of new addresses on your credit report could be a red flag when you're applying for credit.

Your credit report contains inaccurate information

Sometimes credit reports show inaccurate information. Therefore, checking your Equifax, TransUnion or Experian credit reports regularly is advisable. You can then spot any incorrect data quickly that is causing your score to go down.

When credit reports contain inaccurate information, this can be due to a couple of things. The most common is that your lender has accidentally entered the wrong information into your report. But in some cases, it is a sign that you may be a victim of identity theft.

Therefore, if you spot something you think is wrong on your report that has caused your score to go down, make sure to dispute it with all three major credit bureaus - Experian, Equifax, and TransUnion immediately.

Especially if you believe that identity theft could be the cause of the inaccurate details, be aware that some data cannot be disputed, including birth dates, credit scores, and credit inquiries.

A derogatory mark on your credit report

Derogatory marks show that you haven't paid a loan as per your agreement. There are a few reasons why creditors add derogatory marks on credit reports, which could be for:

  • Late payments

  • Charge-offs

  • Repossession

  • Foreclosure

  • Bankruptcy filings 

Derogatory marks typically remain on your credit report for seven to 10 years. However, the effect of a derogatory mark on your credit score goes down over time.

Your credit limit has been reduced

Many people think that if their credit card company offers them a high credit limit, they should ask for it to be reduced, which will have a positive effect on their credit scores. Actually, it could have the opposite effect on their credit report.

While maxing out a credit card will result in your score dropping, decreasing your limit will also affect your good credit rating if your balance stays the same.

This is because it reduces your credit utilisation ratio due to a lower overall limit across all your credit cards.

Credit limits can also be reduced by lenders for several reasons, including late payments, missed payments, or infrequent card use.

You can, however, ask for an increase in your limit or even open a new account, although it's best to do a credit check with the Experian, Equifax, or TransUnion credit bureaus yourself before requesting more credit to see if your score needs a boost before making the application.

You've paid off a loan

It may seem as if paying off your loans is a good thing for your credit rating, but it may actually have a negative effect. This is because your overall amount of credit available to you will have gone down, which may make your percentage of credit utilisation higher.

Don't be surprised if you see an impact on your score if your loan is paid off more quickly than required.

How much will my credit score change?

It's important to note that credit scores aren't one-size-fits-all. Certain changes in your report will have a different impact depending on who you are and how your report looks overall.

For example, if you fail to pay one bill on time but have otherwise paid off your balance in full for years, it's unlikely to cause your score to have dropped significantly.

On the other hand, if you never pay off your balance and have a terrible payment history, the impact is likely to be much more severe.

Should I be worried if my Experian, Equifax, or TransUnion credit score has changed?

It stands to reason that if your Experian, Equifax or TransUnion score has dropped by a large number of points, it's worth taking the time to find out whether your report information is accurate. Errors can then be immediately reported.

On the other hand, if the number of points you've dropped is minimal, it's often best to see whether your score goes up or down over the next few months.

If your points go down, this may indicate a downward trend has begun. On the other hand, if your points increase, this suggests you're back on an even keel.

Can bad credit scores be reversed?

Bad credit scores can always be reversed. The trick is knowing how to turn bad credit scores into good ones. There are several things you can do to improve your score.

  • Paying your bills on time. This will build up a positive payment history on your account.

  • Minimise your overall debt and avoid using credit to make any large purchase you can't pay off before the month's end.

  • Monitor your credit scores regularly so you can correct any dips rapidly.

  • Don't apply for any credit card you don't need.

  • Spend responsibly and set up a budget, so you don't overspend.

  • Use credit-building loans or cards to help restore your score over time.

Follow these top tips, and you'll find that your finances can stay on track in the long term. Although a credit score drop can be worrying, it doesn't always have a permanent effect on your score.

If your credit score dropped recently, you can bring it back up again and prevent it from falling in the future. Remember that your credit score is dynamic, so it can be improved if you adopt the right financial habits.

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