A sudden drop in your credit score can be a cause for concern, especially if you don’t know why it happened. Your credit score plays a vital role in your financial health, affecting everything from loan approvals to interest rates. In this article, we’ll explore some of the common reasons your credit score might have dropped and what steps you can take to fix it.
What Is a Credit Score?
Your credit score is a numerical representation of your creditworthiness, summarising your ability to repay borrowed money. It ranges from 300 to 850, with a higher score indicating better creditworthiness. Lenders, banks, and financial institutions use your credit score to determine your eligibility for credit, loans, and mortgages.
In the UK, credit scores are typically provided by three main credit reference agencies:
These agencies collect and analyse information from your credit report to generate your score.
Common Reasons Why Your Credit Score Has Dropped
If you’ve noticed a sudden dip in your credit score, there could be several reasons for it. Here are some of the most common causes:
1. Missed or Late Payments
One of the most significant factors that affect your credit score is your payment history. If you’ve missed a credit card payment, loan payment, or even a utility bill, it could cause a sharp decline in your score. Even if the payment is only a few days late, it can still be reported to the credit reference agencies and negatively impact your credit score.
How to fix it: Set up direct debits or reminders to ensure that all payments are made on time. If you’ve missed a payment, try contacting the lender to explain the situation and request that they mark it as "paid" on your credit report.
2. Increased Credit Utilisation
Your credit utilisation ratio is the amount of credit you’ve used compared to your total available credit. If you’ve recently increased your credit card spending or maxed out a card, this can negatively impact your score. Ideally, your credit utilisation ratio should be under 30%.
How to fix it: Try to pay down your credit card balances, and avoid using a large percentage of your available credit. If possible, request a credit limit increase, as this can lower your credit utilisation ratio.
3. Too Many Credit Applications
When you apply for a credit card, loan, or mortgage, the lender will typically perform a "hard inquiry" (or "hard search") on your credit file. Too many hard inquiries in a short period can signal to lenders that you may be in financial distress or taking on too much debt, which can cause your credit score to drop.
How to fix it: Only apply for credit when necessary, and try to space out your applications over time. If you’re shopping around for the best deal, some lenders offer "soft" credit checks, which don’t affect your score.
4. Closing Old Accounts
Closing old credit accounts may seem like a good way to reduce your debt, but it can negatively affect your credit score. By closing an old account, you reduce your overall available credit, which can increase your credit utilisation ratio. Additionally, the length of your credit history is a factor in your credit score, and closing an old account can shorten your credit history.
How to fix it: Instead of closing old accounts, consider keeping them open and using them occasionally to keep your credit utilisation low and maintain a longer credit history.
5. Errors on Your Credit Report
Sometimes, a drop in your credit score is due to an error on your credit report. This could include outdated information, incorrectly reported missed payments, or accounts that aren’t yours. If there’s an error on your report, it can significantly lower your score.
How to fix it: Regularly check your credit reports with each of the major credit reference agencies. If you find any errors, contact the relevant agency and ask them to investigate and correct the issue.
6. Defaulting on Debt or Bankruptcy
Defaulting on a loan or declaring bankruptcy can result in a significant drop in your credit score. Both of these are marked as severe negative marks on your credit report and can remain for several years.
How to fix it: If you've defaulted on debt or declared bankruptcy, it may take time to rebuild your credit score. Focus on paying down existing debt, making on-time payments, and using credit responsibly to gradually improve your score.
How to Improve Your Credit Score
If your credit score has dropped, there are several steps you can take to repair and improve it over time:
Make Payments on Time: Your payment history makes up a significant portion of your credit score, so always make payments on time. Setting up direct debits can help ensure timely payments.
Pay Down Credit Card Debt: Reducing your credit card balances can lower your credit utilisation ratio, which can positively impact your score.
Check Your Credit Report: Regularly review your credit report to ensure that all information is accurate and up to date.
Use Credit Responsibly: Avoid missing payments and keep your credit utilisation low. Aim to only use a small portion of your available credit each month.
Consider a Credit-Builder Card: If your credit score is low, consider using a credit-builder card to help improve your score. Just make sure to pay off the balance in full each month to avoid high-interest charges.
Final Thoughts
A drop in your credit score can be frustrating, but it’s important to understand why it happened and take action to improve it. By staying on top of your payments, keeping your credit utilisation low, and regularly checking your credit report, you can rebuild your score over time.
If you’re looking to improve your credit score, consider using credit score monitoring services or credit-builder cards to help track and improve your score.
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