Why has my credit score gone down?

There are many reasons why your credit score might have dropped. Understanding the root causes is the first step in addressing the issue. Here are some of the most common reasons:

Missed Payments

One of the most significant factors affecting your credit score is your payment history. If you’ve missed any payments on your credit accounts, such as credit cards, loans, or utility bills, it will negatively affect your score. Missed payments are one of the key indicators that lenders look at when assessing your credit rating. Even a single missed payment can cause a noticeable drop in your score, especially if it’s reported to the credit reference agencies.

High Credit Utilisation Ratio

Your credit utilisation ratio refers to the amount of credit you’re using compared to your total credit limit. If you’re using a high percentage of your available credit, it can negatively affect your credit score. A high credit utilisation ratio suggests to lenders that you may be over-relying on credit, which can be seen as a sign of financial instability. Ideally, you should aim to keep your credit usage below 30% of your credit limit to maintain a healthy credit score.

Too Many Credit Applications

Every time you apply for a new credit account, the lender performs a hard credit check to assess your creditworthiness. These credit applications are recorded on your credit report, and too many applications in a short period can have a negative impact on your credit score. Repeated credit searches signal to lenders that you may be struggling financially and may increase your credit risk. It’s important to be mindful of how often you apply for new credit.

Closing Old Accounts

You might think that closing old credit accounts is a good way to simplify your finances, but it can actually hurt your credit score. Your credit history plays a crucial role in determining your score, and closing an old account can reduce the average age of your credit accounts. A longer credit history is seen as a positive factor, as it shows that you have experience managing credit. When you close old accounts, it can lower your credit score by shortening your credit history.

High Credit Balances

If you carry high balances on your credit accounts, it can negatively affect your credit score. High balances can lead to a high credit utilisation ratio, which, as mentioned earlier, can lower your score. Additionally, carrying a high balance means you’re paying more in interest charges, which can make it harder to pay off your debt. It’s important to keep your credit balances as low as possible and pay off your debt regularly to maintain a good credit score.

Defaulted Payments

If you’ve defaulted on payments or had accounts sent to collections, it will significantly damage your credit report. Defaulting on a loan or credit card payment shows lenders that you are unable to meet your financial obligations, making you a higher credit risk. This can lead to higher interest rates or even denial of credit. Defaulted payments can remain on your credit report for up to six years, making it harder to rebuild your credit score.

Negative Impact of Identity Theft

Identity theft can have a serious impact on your credit score. If someone gains access to your personal information and opens credit accounts in your name, it can result in fraudulent activity that negatively affects your credit report. It’s essential to monitor your credit reports regularly for any signs of identity theft and report any suspicious activity to the credit reference agencies immediately.

Errors on Your Credit Report

Sometimes, a drop in your credit score can be caused by errors in your credit report. Mistakes can happen, and incorrect information, such as wrong account details or missed payments that were actually made on time, can lower your score. It’s important to regularly check your credit report to ensure all the information is accurate. If you spot any errors, you should dispute them with the credit reference agencies.

Financial Connections to Others

If you have a joint bank account or joint credit accounts with someone else, their credit history can affect your credit score. If your partner or co-signer has a poor credit history or makes late payments, it can negatively impact your credit report. Even if you have a good credit score, your credit rating can be dragged down by someone else’s financial behavior. It’s important to be mindful of your financial connections and ensure that any joint accounts are well-managed.

Moving Frequently

Changing your address frequently can also affect your credit score. Lenders may view this as a sign of instability, which can make them hesitant to approve you for credit. It’s essential to keep your address updated on the Electoral Register and ensure that your credit reference agencies have your current address. If you’ve recently moved, make sure your address is consistent across all your financial documents and credit accounts.

Impact of a High Credit Limit

Having a high credit limit can be both a positive and a negative factor in your credit score. On one hand, a high credit limit can improve your credit utilisation ratio if you keep your balances low. On the other hand, if you consistently use a large portion of your credit limit, it can increase your credit utilisation rate and negatively affect your credit score. It’s important to use your credit accounts responsibly and avoid maxing out your credit limits.

Low Available Credit Limit

If your available credit limit is low, it can have a negative impact on your credit score. A low available credit limit means that you’re using a higher percentage of your available credit, which can increase your credit utilisation ratio. This, in turn, can lower your credit score. To maintain a healthy credit score, try to keep your credit balances as low as possible and avoid using too much of your available credit.

The Importance of Payment History

Your payment history is one of the most important factors in determining your credit score. Lenders want to see that you have a history of making timely credit repayments. Late payments, missed payments, and defaults can all negatively affect your credit report. To maintain a good credit score, make sure to pay your bills on time and avoid missing any payments.

The Role of Credit Reference Agencies

Your credit score is calculated based on the information in your credit report, which is compiled by credit reference agencies. These agencies collect data on your credit accounts, payment history, and other financial behaviors. They then use this information to generate your credit score, which lenders use to assess your creditworthiness. There are three main credit reference agencies in the UK: Experian, Equifax, and TransUnion.

The Impact of Closing Accounts

Closing credit accounts can hurt your credit score. When you close an account, it reduces your overall credit limit and can increase your credit utilisation ratio. Additionally, closing an account reduces the length of your credit history, which can lower your credit score. If you’re considering closing a credit account, make sure to weigh the potential impact on your credit score before making a decision.

Understanding Credit Scoring Models

Different lenders use different credit scoring models to assess your creditworthiness. These models take into account various factors, such as your payment history, credit usage, and credit accounts. Understanding how these models work can help you better manage your credit score and make more informed decisions about your finances.

How to Improve Your Credit Score

If your credit score has dropped, don’t worry. There are several steps you can take to improve it. Start by paying your bills on time, reducing your credit balances, and avoiding applying for new credit accounts too frequently. Regularly check your credit report for errors and ensure that your credit usage remains within reasonable limits. By following these steps, you can gradually improve your credit score and regain financial stability.

Conclusion

A drop in your credit score can be frustrating, but understanding the factors that influence your score is the first step toward improving it. Whether it’s missed payments, high credit utilisation, or closing old accounts, there are several factors that can negatively affect your credit score. By managing your credit accounts responsibly, paying bills on time, and regularly checking your credit report, you can take control of your credit score and work toward a better financial future.

Has Your Credit Score Gone Down?

In This Guide:

What is a Credit Score?