If you regularly look after your credit score, it can be a shock to see it suddenly drop. But don’t panic, the important thing is to work out why and see what steps you can take to fix it. There are lots of reasons why your score can drop. Some of them may not be your fault, others may be errors, and lots will be temporary.
Read on to understand the most common reasons a credit rating might fall, and what you can do.
Your credit score is a number that credit reference agencies (CRAs) calculate, based on your credit history. The agencies analyse borrowing, debts, and any black marks on your file, and use it to come up with a number.
This number is indicative of how reliable you are as a borrower. A high score means the CRAs have calculated that you’re likely to pay your debts on time. A lower score indicates that you are a riskier bet and might miss payments.
Your payment history is the most important factor. If you have missed or late payments, your rating will drop, whereas if you have regularly paid on time, your score tends to be high or ‘excellent’. The CRA looks at public records. This includes things like County Court Judgments or filings for bankruptcy.
There are several reasons your credit score might drop. These can be innocuous things, such as paying off a loan or opening a new line of credit. There can be more serious reasons though, for instance, black marks on your credit rating or identity theft.
If a lender reports that you’ve missed a payment, this will affect your score. Usually, a late payment won’t appear on your file unless you’re more than 30 days behind. Keeping track of all your bills and making monthly minimum repayments is really important. If you’re struggling to keep track, set up direct debits so that your loans are paid off automatically. This can either be for the full amount or the minimum repayments. The former is best for your credit score, but doing at least the minimum will help stop it from dropping rapidly.
If a lender reports a default or you’re issued with a County Court Judgement (CCJ), this will have a significant impact on your score. A default, for instance, means the lender has closed your account because you owe money, and it doesn’t believe you can get back on track. A CCJ indicates that someone has taken you to court over an unpaid debt.
Typically, lenders will warn you before taking these actions, and you should take immediate action if you get a default notice or letter of claim. It’s important to keep on top of debt and make sure you work out a payment plan before lenders put black marks on your file. If you’re worried about problem debt and think you can’t pay, speak to a debt charity for advice as soon as possible.
Here’s where to get free help if you’re struggling with debt
If you suddenly start using more of your credit limit (the total amount that’s available to you) this can be a red flag for lenders. Typically, they want you to have access to credit and pay off debt regularly. But if you suddenly start using a higher percentage, it can indicate that you’re having problems managing your finances. This is known as the credit utilisation rate. To keep your score low, aim to keep your credit utilisation to 30% or less of your available credit limit and pay credit cards off in full.
If your credit limit drops, this can also make your score drop. There are a couple of reasons for this. The first is that it might push your credit utilisation above 30%. The second is that it might mean an older line of credit has closed. Lenders like you to have stable usage and accounts that have been open for several years. Consider keeping your credit limit high, even if your needs drop.
Paying off debt is usually cause for celebration, but you could find that your credit score dips temporarily. For instance, closing off an old loan or mortgage could reduce the average age of your accounts. It could also reduce your overall credit or make the mix of credit types less attractive.
Lenders like stability, and this includes people who stay in one home for a long period of time. This is bad news for young people and renters, who often need to move frequently, thanks to circumstances beyond their control. There’s not a lot you can do about this, but having long-standing bank accounts can help counter the effects.
We all need to apply for credit occasionally, there wouldn’t be much point in a credit score if we didn’t. But applying for a new loan or credit card typically leaves a mark on your file. Even when you’re successful, you might see your score dip briefly. Lots of failed applications can wreak havoc. Take advantage of soft searches, which help you see if you’ll be accepted when you apply. If you are rejected, wait six months before trying again, and take steps to see what went wrong and improve your score in the meantime.
It’s important to check your credit reports regularly, looking for errors. You need to check all three reports, Experian, Equifax and TransUnion. Make sure that you recognise all the accounts and transactions. Raise a dispute for anything that doesn’t look right. This can stop errant mistakes from ruining your score.
Another reason to regularly check the reports is to protect against identity theft. If your score suddenly plummets, it could be that a criminal has accessed one of your accounts and is taking on debt or spending lots. Call the lender immediately if you spot signs of nefarious activity. And report to the police via Action Fraud.
It’s impossible to put an exact number on this because it depends on a variety of factors, including which CRA you’re looking at and what’s dropped off your record. It also depends on the overall picture of your credit history. If you have seven defaults, removing one won’t make much difference. If you have just one, when it vanishes your score could improve dramatically.
Build up your credit rating across the board, so the balance of your finances looks good to lenders.