If you're regularly checking your credit report as you're supposed to, you may be horrified if you discover that your credit score has dropped. It's only natural to wonder why your credit score is dropping, and there are several factors that can cause your score to drop.
Credit score drops correspond with activities that are calculated negatively by the credit scoring models that credit bureaus use to determine your credit rating. Therefore, if you want to understand better why your credit score has gone down, you need to get up to speed on the elements that go into calculating credit scores.
By far, the most significant factor that will affect your credit score is your payment and credit history. It stands to reason that a late payment or missed payment will cause your overall credit score to drop. Another key factor is your credit utilization - 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. Inaccurate information held on your credit report, among other things, will negatively impact your credit score too.
With this in mind, let's take a look at some of the most common reasons behind a credit score drop and how you can increase your credit score back to its previous level in this quick 5 min read.
By far, your payment history is the primary 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. If you miss a payment - even just one - this could cause your credit score to take a hit. 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.
One missed payment is a problem, but multiple missed payments on your debts is 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.
Credit utilization is a major factor on credit reports. The term "credit utilization" means the amount of your available credit that you're using 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 level of credit utilization might indicate to lenders that you may find paying off a loan or new credit card debts difficult.
For this reason, it's best to keep your credit utilization level at under 30% of your credit cards' limit.
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. Since all hard inquiries will be recorded on your credit report, it can have a negative effect on credit scores. This is especially likely if you apply for credit cards or loan applications in large numbers within a short time. This is because lenders may believe you're desperate for credit, which could deter them from lending to you.
Also, 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.
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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.
If you recently closed down an old bank account, your credit score can take a hit. This is because closing an old account means your accounts' overall age has dropped. Credit scores often follow suit in such cases.
Also, if an account is closed, this could reduce your overall available credit limit and how much credit usage you have open to you for spending. This will potentially push your credit utilization over the desired level and make your credit score drop.
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.
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 utilization 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 check your credit score 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.
Sometimes, credit reports show inaccurate information. Therefore, checking your Experian, Equifax or TransUnion 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 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.
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.
It's important to be registered on the Electoral Roll at your current address if you want to ensure a good credit score. This is because it proves to any potential lender that you're easily contacted and have a stable residence. This 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.
You needn't worry too much about this 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.
It's important to note that credit scores aren't one-size-fits-all. Certain changes on 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.
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 in points 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.
Bad credit scores can always be reversed. The trick is knowing how to turn bad scores into good ones. There are several things you can do to improve your score.
Always pay bills on time. This will build up a positive payment history on your account.
Minimize your overall debt and whenever possible, 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 isn't always a permanent effect on your score. 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.