Has your credit score taken a plunge and you’re unsure why? We’ve rounded up 10 of the most common reasons your score could have gone south.
If you’re monitoring your credit score regularly, as part of trying to improve it, you could be alarmed if it suddenly heads in the wrong direction. Months of careful budgeting can appear to be undone in an instant, but there are several reasons why your credit score may have dropped suddenly.
While it’s frustrating, discovering why and then remedying it is the best plan to make sure your score starts moving in the right direction again. Read on to discover 10 reasons why your credit limit may have dropped.
And remember, all of these are reasons are repairable with careful money management and time. Head here to learn about everything you can do to improve your credit score.
It’s fairly straightforward logic that failing to meet payments will send the wrong message to potential lenders and impact your credit score. If you are late or miss a payment for a credit account it can be logged on your report, which will usually knock points off your score.
This includes every form of credit, not just credit cards. So if you have a store card, loan, mortgage or you pay for your car insurance monthly, missing a payment on these can cause a drop. Also, if you use payments services you might avoid charges initially if you miss a payment but it can still damage your credit score immediately.
Late payments will show up for up to six years on your credit report, but the impact will lessen over time. Lenders will also look at the bigger picture, so one missed payment alongside regular ones may not be looked upon as negatively.
You’ve defaulted or got a CCJ
Defaults are when your lender decides that after you not fulfilling the terms of your agreement (usually when you’ve missed or underpaid your payments on 3-6 back to back occasions). However this can vary depending on the lender’s terms. A CCJ is the next stage if defaulting doesn’t bring the arrangement to a satisfactory conclusion, resulting in the lender taking you to court over the matter.
Again pretty obvious, but both of these things are massive red flags to lenders about your suitability to offer credit and will make your score with every credit agency lower. They both take six years to leave your record but certain providers will still offer credit to people with a CCJ or default on their record.
If you’ve ever taken out joint credit or a joint bank account with another person or acted as someone’s guarantor, your association with them can be the reason for a negative change in your credit score. Any financial mistakes they have made may then be attributed to you, which could cause your score to drop.
You can apply for the association to be removed if you have no financial connection with them any longer. It’s also worth thinking about how to move away from financial associations if you are about to end a relationship, either personal or professional. You can read our explanation on how to buy your partner out of your house as one example.
Your address history is part of your credit history. Whilst where you live is irrelevant, if this showcases a number of regular house moves, it may appear to make you look less reliable towards lenders.
It’s also really important that you update every source of credit you have to your new address, as again it can look inconsistent if your credit report show multiple addresses. Also, make sure you are up to date on the electoral roll. You can read more on how your address affects your credit score.
Mistakes on your report
Mistakes happen, but if something is inaccurate on your report it can cause you to have a lower score than what, in reality, you deserve. If you do think there is an error on your report you can contact the credit scoring agency in question to dispute it and ask for it to be removed.
You haven’t taken any credit for a while
Your credit history, which is all the records of you borrowing and paying back money, is very important for your score. If you have had long periods where you’ve not borrowed any money (usually more than a year) this can make your score drop. This can be confusing as why would your credit score get worse if you have had no negative activity?
This is because lenders like to see people who can show evidence of regularly paying money back, so a limited credit history won’t show this. Your credit score also only takes into account activity in the UK, so if you’ve been living abroad for an extended period of time this will also mean you are inactive. This Experian article on building your credit history outlines some of the factors to take into consideration.
Spikes in credit usage
People often use credit for rainy days, which means when the rainy day comes you may suddenly use a large percentage of your available credit. Say you have unexpected car expenses of £1150 and you use your credit card for this, which has a limit of £1500 and a previous balance of £150. You’ve gone from 10% usage of your credit to 80% in a very short space of time.
The percentage of how much of your available credit that you are using is called your credit utilisation ratio. The higher this percentage is can impact negatively on your score, as lenders may view you as someone who shouldn’t take on further credit. Here’s more advice on how much credit utilisation you should have.
Closing an old account
Have you recently closed a credit card account? Your credit score could be damaged by this, as it will affect your credit utilisation. You may have paid off one account but still be close to your limit in others. Your credit utilisation is calculated for all applicable sources of credit available as well as single ones, so the credit limit on the account you’ve closed will be subtracted from your total available credit.
It’s not as simple however as keeping all old accounts open, as (confusingly, we know) this can also have a negative impact. Some lenders will look at total credit available before making a decision, so a credit card you never use will add that credit limit to that figure. We explain why it’s important to close old accounts, but it’s always best practice to base every decision to keep or close an account based on your own personal circumstances.
Multiple credit applications
Experian point out that multiple credit applications “in a short space of time can make it look like you’re desperate or overly reliant on credit”, which is bad for your credit score. Try to use soft credit search services before you apply for credit to check your availability, as this will reduce the risk of you being rejected and a hard search being registered on your file.
Reducing your credit limit
This may sound odd, particularly if you’ve worked hard to reduce your debt, but decreasing your credit limit can have a negative impact.
It’s because, yes you guessed it, it will again reduce your credit utilisation. Owing £500 on a credit limit of £1000 is a credit utilisation percentage of 50%, compared to 33% when it is £500 owed on a limit of £1500.
Need further reading? Check our section on all you need to know regarding improving your credit score.
Disclaimer: All information and links are correct at the time of publishing.
By Jimmy Coultas
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