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 if you’re wondering why your credit score has gone down, there are actually several possible reasons.
Let’s take a look at 10 common reasons why your credit score could have gone down.
1. 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 go down 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 cosigner before the payment’s due date or, if need be, helping them to cover any payment deficits.
2. Your credit utilisation ratio has changed
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) can be a lower credit score.
It’s an important factor in determining credit scores. VantageScore says that the credit utilisation ratio is “extremely influential,” and FICO® says that it accounts for 30% of your overall score.
If you spent more than usual last month (for example, because of an unusually large purchase), it will increase your credit utilisation ratio. How much it will impact your credit score depends on how much of your available credit you have used.
3. You closed an old credit card
Many people think that closing an old credit card will help them improve their credit score. Unfortunately, it could cause your credit score to go down.
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. Similar to the point above, this means you might be using more of the credit that’s available to you than you were before you closed the card, meaning that your credit utilisation ratio goes up.
4. Your card issuer lowered your credit limit
Credit card issuers sometimes lower customers’ credit limits for different reasons. The result of a lower credit limit might be a higher credit utilisation ratio and a drop in your credit score.
If this ever happens, you can call your lender and ask why your credit limit has been reduced and find out whether there is anything you can do to raise it.
5. There’s a new 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.
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.
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 to make 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. You can use a Credit Card Eligibility Checker before you apply to be sure.
6. There are errors in your credit report
Sometimes, the reason why your credit score has gone down may be due to errors in your credit report. For example, one of your payments could have been reported as late or recorded incorrectly. Or you might have been a victim of identity theft.
That’s why it’s useful to monitor your credit report. Make a habit of checking your credit report frequently in order to identify any errors or problems. If you find any, you can then take action to fix them.
7. You have a forgotten account
A forgotten account could also cause your credit score to drop. Maybe you have a card you no longer use with a small amount outstanding. It’s worth taking the time to make sure you’re on top of all your payments.
8. You’ve paid off a loan
We usually think of paying off a loan as a good thing. However, even this could be a reason why your credit score has gone down. That’s because paying off a loan could change your credit mix. In general, lenders prefer you to have a mixture of different types of credit, including different things like credit cards, mortgages and personal loans.
9. You’ve moved to a new address recently
Moving home can impact your credit score and cause it to drop. It’s important to make sure you update your address on the electoral register so that it matches the address on your credit report.
10. You are the victim of identity theft
If you’re a victim of identity theft, it can cause your credit score to drop. Someone might have applied for a credit card or personal loan in your name, using your address details.
If you discover evidence of identity fraud when checking your credit report, then it’s important to take action as soon as possible. Contact a credit agency and tell them about the fraud. They will be able to put a fraud alert on your account.
Take control of your credit score
There are plenty of reasons why your credit score might go down.
If your credit score has dropped recently and you need to improve it, think about getting a credit card for poor credit. Consistently keeping your balance low and paying it off over time may help you get your score back up. Our guide to credit cards for bad credit is a good place to start learning which cards might work for you.