You’ve paid your bills on time... you’re on the electoral roll… but your credit score has dropped! What’s going on?
If you’re hoping to get approved for a financial product – or just have an interest in your financial wellbeing – you might be monitoring your credit score. We believe this is good practice because by knowing your score, you’ll have a better understanding of whether you’ll be approved for credit. It’s also worth viewing your credit report, as this will highlight areas you need to improve – such as high levels of debt or out-of-date information.
However, sometimes you can think you’re doing everything right and your credit score still drops! How frustrating is that? So, here are some not-so-well-known reasons why yours could have taken a bit of hit.
1) You’ve opened a new form of credit
Have just got a new credit card or loan? Maybe you’ve recently switched energy suppliers or taken out car finance? Well, all of these things may result in a hard credit check which can impact your credit score. This might explain the drop you’ve seen. However, if you regularly make your repayments on time and in full each month, this should only be a short-term effect.
Tip: Although you can’t avoid a hard check when taking out a new form of credit, you can avoid them when shopping around or getting quotes for financial products. Eligibility checkers tell you if you’re likely to get approved without won’t impact your credit score. They only perform a soft search on your report which isn’t visible to lenders, unlike hard searches. And if you’re approved, you can then apply for credit in confidence.
2) You’re spending more than normal
Spending a bit more than normal on your credit card only becomes a problem when you use too much of your available credit limit. If you do, your credit report will show that you have a high credit utilization rate. Lenders don’t like this as they think you’re struggling to live within your normal salary and are becoming dependant on extra credit. This could cause your credit score to drop, even if you’re making your minimum payments on time and in full.
Tip: Try to pay off a chunk of your credit card bill as this will lower your credit utilization rate. We recommend not using more than 30% of your available limit if you want to keep the lenders happy.
3) You’ve lowered your credit limit
You’re not spending anywhere near your credit card limit, the smart thing to do is lower your limit, right? Wrong! This is because it will affect your credit card utilization rate, as mentioned above.
You had a limit of £2,000, but only spent £500. That meant your credit utilization rate was 25% which is classed as low.
If you reduced your limit to £700, but still had a bill of £500, your credit utilization rate skyrockets to over 70%. This is classed as high and isn’t a good sign to lenders.
4) Inaccurate information has been added to your profile
Although it isn’t common, it can happen. So if your credit score has taken a dip and you have no idea why, check your credit report for mistakes. You might find that it shows you made a payment late when you paid it on time… or that your loan and credit card amounts haven’t been updated and are higher than they should be.
Tip: You can access your credit report for free though Clearscore, Noddle and TotallyMoney. Simply sign up and you’ll have free access for life!
5) You’ve fully paid off your loan or mortgage
Isn’t it a good feeling when you finally come to the end of your loan term and you can enjoy more financial freedom? Well, it may be a good thing for you, but it’s not necessarily a good thing for lenders – and that’s why your credit score could have gone down.
This is because the loan was consistent and reliable proof that you could manage your money responsibly and make your repayments on time (providing you actually did). Now that is evidence has disappeared.
Tip: To keep your credit score from falling, use a credit card for small purchases and pay the balance off in full each month. This will act as evidence that you can still manage your money well after having paid off your loan or mortgage.
Want tips on how to give your credit score a boost? We’ve got 5 easy ways!
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.