Why Has My Credit Score Gone Down?
Common reasons why your credit rating has dropped
Your credit score has a considerable impact on your finances, whether your aim is to take out a loan, get a credit card, apply for a mortgage, or even start a mobile phone contract. It’s therefore understandable to be concerned if you see your credit rating drop, but it is usually easily explained.
The fact that you noticed your credit score go down means that you are checking your credit report frequently, which is a good start. There are, however, a few things that you should know if you want to identify why your credit score has gone down, and how you can improve it.
In this guide:
- The factors that determine your credit score
- 6 reasons why your credit rating might go down
- Check your credit score today
There are three main credit reference agencies in the UK – Experian, Equifax and TransUnion (formerly CallCredit) – and it is these organisations that determine your credit score and distribute the information within your credit report to other credit reporting websites and lenders.
Each credit reference agency (CRA) has a different method of calculating your credit score, but it is generally based on a wide range of factors within your credit report, including:
Lending and credit history
Enquiries on your report
Your credit report can, therefore, drop or increase due to a change in any of the above aspects of your life – it doesn’t always relate directly to your finances.
There are several common reasons why your credit score or rating may have decreased, from missing loan repayments to court judgements against you.
Here are six ways you could have damaged your credit rating (sometimes without even realising):
1. Late or missed payments
It should come as no surprise that missing payments on loans, credit cards or any other form of debt is almost certain to have a detrimental impact on your credit score.
If you are continuously late making payments, you will be deemed an irresponsible borrower and lenders will see you as a high-risk customer, meaning that you may struggle to get a good deal when applying for credit (if you manage to get one at all).
It’s worth remembering, however, that making just one late payment will have less of an impact on your long-term creditworthiness than if you consistently miss payments. For this reason, you should always make every repayment, even if it’s late, because avoiding it for a long duration will only worsen the impact on your credit rating.
How late you make the payment also has a bearing on the impact it has on your credit score, according to Clear Score, which stated that your rating is likely to drop even further if you are more than 30 days late making a payment.
2. Credit utilisation: How much credit you use
According to Experian, your credit utilisation rate “can impact up to 30% of a credit score”, making it one of the most influential factors in determining your rating. But what exactly is it?
When you take out any form of credit (usually a credit card), you will be granted a credit limit. This is essentially the total amount that you are able to borrow, and the average credit limit in the UK is between £3,000 and £4,000, according to Martin Lewis’ Money Saving Expert. The credit limit you get depends on a variety of factors, including your income and credit history.
Your credit utilisation is essentially how much credit you use versus your credit limit. You should always stay well below your credit limit when possible, with most experts recommending that you keep your credit usage (credit utilisation) below 30% of your limit. So, if you had a credit limit of £3,000, you should not spend more than £900 on your credit card per month.
Using too much credit, especially within a short space of time, is bad for your credit score, but so is using it too little or not at all. If you don’t use enough of your credit limit (for instance, if you’re spending less than £5 on a credit card per month), you aren’t providing enough proof to lenders that you can manage a meaningful amount of credit reliably.
There is ultimately a credit utilization ‘sweet spot’ between borrowing too little and too much, so it may be worth experimenting by using different amounts between 5% and 30% of your credit limit and evaluating how this influences your credit score by checking it regularly with Check My File or any other credit reporting website.
Again, we must stress that you should not exceed a credit utilisation of over 30%.
3. Default accounts
Your account goes into arrears (also known as a default) if you consistently miss payments and do not clear your debt. When this happens, it essentially means that the lender or bank has determined that you will not be paying off your debt and has ended your agreement. Lenders usually close your account after three to six months of missed payments, and they can subsequently take legal action to recover the amount you owe.
Simply put, having no defaults on your credit report should be your aim.
But, if you do have a default, it will appear on your credit report and your credit score is likely to drop significantly as a result. Your creditworthiness is likely to be damaged by a default and you may struggle to access the best deals on the market.
Note: A default will remain on your credit report for six years, irrespective of whether you pay off the debt or not.
4. Changing your home address regularly
Although it may not necessarily relate to your finances, it’s not uncommon for lenders to see frequent changes to your home address as a sign that you are in an unstable or insecure position.
Lenders like stability as it can suggest that you’re more likely to fulfil monthly payments, so if you’re constantly moving homes, your credit score might be negatively affected.
5. Closing an old account
Some people notice a decrease in their credit score after they have closed a credit account – usually a credit card.
This may be due to the fact that closing an old account can result in a decrease in the overall average age of your accounts, which can cause your score to drop.
Closing an account may also mean that you now have less credit available, which could, in-turn, increase your credit utilisation over the recommended 30% mark and damage your credit rating.
However, whether or not you should close an unused account depends on a variety of factors – including the risk of fraud and how many accounts you have – so you may need to get in touch with your bank to discuss the best option for you.
6. Taking out new credit
While you need to take out credit in order to increase your creditworthiness, you may initially notice a drop in your credit score when you do so.
There are two primary reasons why this might happen:
Hard credit checks. A lender carries out a ‘hard search’ or a ‘credit application search’ as standard when you apply for credit, but this can unfortunately have a negative impact on your score. As you apply for more credit, more ‘hard searches’ will be recorded on your credit report, which leads lenders to believe that you are too eager for credit. You should use a credit eligibility tool before applying, in order to avoid the risk of being rejected by a lender and being required to apply for credit elsewhere.
Your average credit account age decreases. The average age of your credit accounts naturally decreases when you take out a new form of credit, which occasionally has a negative impact on people’s credit scores, as lenders typically prefer older, more stable credit accounts.
This is usually a temporary dip in your credit score, but it should increase as your account ages, as long as you show that you are a responsible borrower.
It's also worth noting that payment holidays may also have a negative impact on your credit score, despite promises from credit reference agencies and government officials that they would not damage your future credit applications.
Your credit score can also be negatively affected by County Court Judgements, which you can read about in our guide to CCJs and Credit Scores.
You might like: How to Protect Your Credit Score in 2020
One of the best ways to get an accurate idea of your true credit rating is to use Check My File.
Unlike other credit reporting websites, Check My File uses information from four major CRAs in the UK – Experian, Equifax, TransUnion and Crediva – to provide you with an extensive credit report.
Tap the button below to check your credit score today, or head over to our full Check My File review or more information.
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