The information in your credit report is constantly being updated. So, as your report changes, so does your score.
But what if your score drops seemingly for no reason?
It’s frustrating when you’re trying to improve your score and it suddenly takes a turn in the wrong direction. However, there’s usually a logical reason behind it.
Read on to discover some of the most common reasons your score could go down, so you know what to look out for in the future and how to keep your score healthy.
Reasons Your Credit Score Could Decrease
- Missing or late payments
- You moved home…again
- You’ve applied for or taken out a new line of credit
- You’ve closed an old account
- You’ve made a large purchase
- Your financial connection’s credit score has dropped
- Your credit limit decreased
- There’s inaccurate information on your report
- Your financial circumstances have dramatically changed
1. Missing or late payments
Unsurprisingly, failing to meet payments or pay them on time negatively impacts your credit score. As your credit score shows how you manage your debt, missing and late payments can suggest that you’re struggling and will almost always knock points off your score.
The good news is, a one-time mistake doesn’t ruin your score for good. While a missed payment will show on your report for six years, lenders tend to look at the bigger picture.
So, while missing one payment may temporarily wobble your score, you can soon get it back on track by ensuring you make all others on time.
2. You moved home…again
Your address history forms part of your credit history. And unfortunately, moving home frequently may make you look less reliable towards lenders, so can have an impact on your score.
To lessen the impact, if you’re moving, make sure you update your new address with your creditors and register on the electoral roll.
3. You’ve applied for or taken out a new line of credit
If you’ve recently applied for or taken out credit, it can have a negative impact on your credit score.
Firstly, when you apply for credit, a hard search will be carried out on your report. This type of search is recorded on your credit report and can drop your score by a number of points.
If you’ve made multiple applications, it can have an even worse effect, giving the impression you are desperate for credit – something that lenders see as a red flag. This is why it’s always sensible to use a soft search facility when looking for credit initially.
Finally, when you take out new credit, it causes the average age of your credit accounts to drop. The average age of your credit accounts is important for lenders, as older accounts suggest stability and a longer history of borrowing, so will be reflected in your score.
However, the effects of this are usually only temporary, and if everything else is on track, you should see your score rise once again.
4. You’ve closed an old account
You’ve finally paid off your credit card and closed your account. Surely this will make you look good to lenders?
Actually no. While it’s great you’ve worked hard to pay off your debt, closing the account will affect your credit utilisation rate, which could damage your credit score.
Your credit utilisation is looked at across all credit, as well as single accounts. So the credit limit on the account you recently closed will be taken off your total available credit, making your utilisation rate higher.
So should you always keep old accounts open? Well, no, that’s not true either. Some lenders will also look at total available credit that’s not being used and wonder why you’re applying for more.
It’s best to base your decision individually on your personal circumstances.
Read More: What Is A Credit Utilisation Rate?
5. You’ve made a large purchase
Unexpected expenses happen, and it’s always good to have a credit card to hand if they do, particularly if you don’t have savings.
Unfortunately, using a large percentage of your available credit will cause your credit utilisation rate to surge and your credit score will drop.
For example, you have a credit card with a limit of £1,000. So far, you’ve only used £100, so your credit utilisation rate is 10%.
But then an unexpected expense comes up for £800 and you have to use your credit card. Suddenly, your credit utilisation has soared to 90%, and your credit score will probably suffer in reflection.
6. Your financial connection’s credit score has dropped
It’s not always just your own finances that are taken into account when it comes to your credit score.
If you’ve ever had a joint bank account, mortgage or are a guarantor for someone, this can negatively impact your finances if they start to struggle financially.
The good news is, you can always request to have a financial association removed from your credit report.
Bear in mind, though, this will only be accepted if you no longer hold an active account with them, so check everything’s closed before you do.
7. Your credit limit decreased
For a number of reasons, credit card issuers occasionally decide to lower a customer’s credit limit. While hopefully it doesn’t impact you too much, it can affect your credit score.
This is because a lower credit limit will affect your credit utilisation rate. To limit the effect of this, either speak to your card issuer or alternatively try and get your balances down to even out the rate.
8. There’s inaccurate information on your report
Occasionally, a credit score will drop not because of anything you’ve done, but because of an administrative error.
This could be down to someone being added to your account with a similar name. Or a lender reporting the wrong information.
This is another good reason to regularly check your report so you can flag any problems straight away.
9. Your financial circumstances have dramatically changed
Bankruptcy, Individual Voluntary Arrangements (IVAs) or Debt Relief Orders (DRO) all can play havoc with your credit score.
Unfortunately, there are no quick fixes to this in terms of your credit score. However, the older the arrangement, the better it looks to the lenders.
So it’s just a matter of being patient and paying those bills on time, and your credit score will slowly start to come back up once more.
What is a good or bad credit score?
There are three main Credit Reference Agencies in the UK – Equifax, Experian and TransUnion – and each have their own scoring system. Ideally, it’s best to be at least ‘good’ with all three.
A good credit score looks better to a lender, as it shows you are less riskier as a borrower. This means not only do you have more of a chance of being accepted for credit, but you’ll also qualify for more products at more competitive rates – something that can save you significant amounts in interest.
How to improve your credit score
There are many ways to improve your credit score, so here a few tips to help you get started:
|Check your report regularly||Make your payments on time|
|Make a budget and stick to it||Minimise your debt|
|Avoid multiple applications for credit|
Check your report regularly
Regularly check your credit report. Not only will this help spot any errors that may come up, but it’ll also help you to identify any areas of your finances that you may need to work on.
Make your payments on time
Keep paying your bills on time. Missed payments are probably one of the most common and avoidable ways to lower a credit score. If you can, set up automatic payments for at least the minimum amount.
Make a budget and stick to it. Your credit report reflects how responsible you are as a borrower. If you tend to miss payments or live on credit, a budget can help you see where you need to cut back and help you get your finances back on track.
Minimise your debt
Obviously, this isn’t a quick fix. But try to pay down your debt as much as possible – ideally getting your credit utilisation ratio to around 30%.
Avoid multiple applications for credit
If you do need to get a credit card, loan or finance, try to only use a soft search in the first instance. This will show you if you’ll be approved without leaving any damaging marks on your credit history.
While it does take time to improve your credit score, it’s always worth trying to do so before you apply for any credit facility to give your application the best chance of success.
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