It’s no secret that missing a payment or making a late payment on a loan or a credit card can seriously harm your credit score. But your credit score can also drop for many other reasons – some of which might not be so obvious.
If your score has recently dropped, here are five reasons it might have happened, as well as tips for fixing them.
1. You closed an old credit card
Many people actually make the mistake of thinking that closing an old credit card will help to improve their score. Unfortunately, this is not the case.
When you close a credit card, the credit limit on the card is removed from your credit records. As a result, the total credit available to you reduces. It then looks like you’re using more of the credit that’s available to you, meaning that your ‘credit utilisation ratio’ goes up.
Your credit utilisation ratio is the percentage of the total credit available to you that you’re actually using. The impact of a higher credit utilisation ratio (using more of the credit you have available) is a lower credit score.
So, in a nutshell, think carefully before closing an old credit card. Keeping it open – even if you don’t use it – might actually be beneficial for your credit score.
2. Someone else missed a payment
If you co-signed a credit card or loan agreement for someone and they missed a payment, your credit score could drop as a result.
Even if you’re not the primary borrower, it’s ultimately your responsibility to ensure payments are made on time if you don’t want your credit score to be affected.
That could mean sending gentle reminders to the co-signer before the payment’s due date or, if need be, helping them to cover any payment deficits.
3. You card issuer lowered your credit limit
Credit card issuers sometimes lower customers’ credit limits for different reasons. It could, for instance, be in response to a troubling development in your credit report.
The result of a lower credit limit is a higher credit utilisation ratio and a drop in your credit score.
If this even happens, call your lender and ask why your credit limit was reduced and whether there is anything you can do to raise it.
4. There was a hard search on your credit report
Every time you apply for a new credit card or loan, the lender will request a copy of your credit report from one of the major credit reference agencies (Experian, TransUnion and Equifax) before they approve your application. This is known as a hard search, and it can cause your credit score to drop by a few points.
A hard search is often unavoidable when you’re applying for a new credit card or loan. However, the effect of a hard search is temporary. The search only stays in your record for 12 months before it naturally drops off.
Having said that, several hard searches can cause some serious damage to your credit score.
To minimise the number of hard searches on your report, consider spacing out any applications for new credit. A good rule of thumb, according to Experian is no more than one application every three months.
It might also be a good idea to limit your credit applications to those that have a high chance of approval.
5. There are errors in your credit report
Sometimes, a credit score drop may be due to errors and mistakes in your credit report.
One of your payments could have been reported as late or recorded on a wrong account. Or you might have been a victim of identity theft.
That’s why it’s useful to monitor your credit records. Make a habit of requesting and reviewing your credit report frequently in order to identify any errors. If you find any, you can then take action to fix them.
There are plenty of reasons why your credit score might drop. The good news is that most causes can be avoided or fixed through a few simple actions.
For more useful tips on getting your credit back in shape, check out our article on how to improve your credit score.
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