A low credit score can be a hindrance to securing many things in life, from buying a home or a car, to simply having a financial safety net should your circumstances suddenly shift.
It’s important to remember that whatever the reason for a low credit score, it can change andimprove over time. However, to do that, it’s best to understand why your score is low, so you can make the right steps to improve it.
Here are some common reasons for a low credit score:
1. You’ve missed payments
“If you’re late or you’ve missed payments on a credit account, this can give your credit score a knock. The best way to avoid this is to set up direct debits, so you don’t accidentally miss any payments.”
If you’re struggling then contact your lender as they may be able to discuss any potential alternative payment plans.
Remember, this goes for all credit accounts, including credit cards, store cards, loans, mortgages and some mobile phone contracts. However, lenders will look at the bigger picture, so one missed payment alongside regular ones may not be looked upon as negatively as consistently missing payments over a long period of time.
2. You’ve defaulted or got a CCJ
This means the lender has closed your account with them and is taking further action to reclaim the money owed. They are a last resort for a lender, and will usually be done when you've underpaid or missed payments on 3-6 back to back occasions, and they’ve been unable to get in touch and work out a resolution with you.
The lender will send out a default notice which gives you a minimum of two weeks to repay the debt in full. It’s crucial you contact your lender as soon as you receive this, as they may negotiate a repayment plan with you (although they are under no legal obligation to do so).
If a CCJ or default is recorded on your credit file, it will stay there for six years and will lower your score. The good news is that this lessens over time. Eventually, after six years, it will no longer show on your credit report.
3. Financial associations
Have you ever had a joint credit agreement or bank account with another person or acted as someone’s guarantor? This is known as a financial association, and any financial mistakes they have made may also be attributed to you.
You can get a notice of disassociation if you no longer have a financial connection with the person, after this you’ll no longer be financially linked.
4. Mistakes on your credit report
Inaccuracies on your credit report can mean your credit score is lower than it should be.
It’s a good idea to regularly check your report (here's how you can do that for free) with all three main credit reference agencies to make sure everything is correct. If you do think there is an error on your report, you can contact the agency directly to dispute it and ask for it to be removed or corrected.
5. You’re not on the electoral roll
Lenders want to be reassured you are the person you say you are, and being registered on the electoral roll (this is also known as ‘registering to vote’) is one of the best ways for your identity and address to be proven.
It’s easy to get on the electoral roll, you can do it online and Gov.uk claim it only takes five minutes.
If you can’t get on the electoral roll (for example if you’re not from an EU or Commonwealth country), you can register your proof of address with the credit reference agencies independently using a UK driving license or utility bills. Contact the agency directly to find out how to do this.
6. You have little or no credit history
If you have no record of handling credit previously, lenders have no evidence that you can borrow responsibly. Therefore having little to no credit history can give you a lower score than you’d like.
Your score is worked out via credit history from the past six years, and periods of inactivity will reduce the active level of repaying credit on your account. It also only goes off any borrowing in the UK, so if you’ve been living abroad for an extended period of time this also translates as inactivity.
If you’ve only recently started borrowing or you’ve been inactive, you could help build a positive credit history by taking out a credit building credit card, but just make sure you pay back the amount in full each month to give the best chance of boosting your credit score.
7. Spikes in credit usage
How much you borrow also impacts your score, as this gives a better idea of your ability to afford borrowing any more money. So if you have suddenly spent more on a credit card, say buying a raft of Christmas presents or booking flights, this can cause it to drop.
This is based on your credit utilisation ratio. This is the percentage of your available credit that you are using, so if you suddenly spend £750 on a £1500 credit limit, and you previously only owed £150, you’ve gone from a 10% credit utilisation to 60%. Exact figures on the ideal percentage you should use vary, but all the figures sit between 20%-30%.
8. Closing an old account
Closing old accounts can also impact your credit utilisation. This is because it takes into account not just how much you owe on one account, but how much credit you have available overall. So if you’ve recently closed an old account, this may have caused a credit score drop.
Confusingly though, it’s not always a good idea to keep old accounts open either. Some lenders look at the total credit available before making a decision, so a credit card you never use will add to that figure and potentially make you look too reliant on credit. Read about what you should consider before deciding to close an old account.
9. Multiple credit applications
Because credit scores are automated, there’s a degree of guesswork done to form perceptions of your borrowing behaviour. Applying for multiple sources of credit in a short space of time is one example.
You might do so because you’re shopping around, but to lenders this could be because you suddenly need a lot of credit. It’s magnified as well because it doesn’t show up on your credit report whether you have been accepted or not, so they could assume you were hopping from one rejection to another.
Try to restrict your credit applications as much as possible, using soft checking credit search services (also known as eligibility checkers) before you apply for credit to check your availability.
10. You’ve only got one type of finance
The variety of debt sources you have is also important. Successfully managing an overdraft, mortgage, credit card, car insurance and certain mobile phone contracts demonstrates an ability to handle credit well, so if you’re only paying one type your credit history may not be as detailed and positive.
11 - You’ve recently reduced your credit limit
This is another confusing one: decreasing your credit limit could actually have a negative impact on your score. This is down to your credit utilisation ratio. Situations like this are still highly dependent on your own circumstances. Reducing your limit may result in you having a slightly lower credit score but you are also less prone to temptation so you can manage your finances better in the long-run.
12 - You’ve taken out a mortgage
Have you recently taken a mortgage out? This can cause your score to drop, because your ability to afford debt can be viewed differently as a consequence.
The good news is that this drop is likely to be temporary, and a mortgage will soon be a positive factor on your score. Regularly paying money back on time will showcase financial trustworthiness.
Remember, your credit score will change over time
Your credit score will naturally shift and fluctuate over time, based on your behaviour and the changing circumstances of your finances.
Sudden temporary drops in your score are often nothing to worry about and even the most serious of mistakes are repairable with time.
Contacting Credit Agencies
If for any reason you need to contact the main three UK credit agencies to discuss your report, their details are as follows: