Brean Horne
Rhiannon Philps
Credit scores can be somewhat of a mystery, so if you’ve noticed a dip in your credit rating – don’t panic. There are lots of reasons your credit score might go down (or up).
Sometimes minor changes, such as moving to a new address or closing a credit account you no longer use, may have a minor impact on your credit score, so it’s worth waiting to see if your rating changes after a couple of months.
However, you can contact each credit reference agency directly for more details about any significant drops in your credit score because it could be linked to more serious financial issues or even fraudulent activity.
Keeping an eye on your credit report and checking your credit score regularly can help pinpoint what may have affected your score.
Read on to find out 10 common reasons that could explain why your credit score has gone down and the steps you can take to improve your credit rating.
1. Using too much credit
Using high proportions of credit available on your credit cards or going over your credit limit can cause your credit score to drop. This is because lenders can look at your credit usage, sometimes called your credit utilisation rate, to help decide whether you are a responsible borrower.
Credit reference agencies generally recommend that you aim to keep your credit utilisation rate below 30% to minimise the impact it can have on your credit score.
You can calculate your credit utilisation yourself using this formula:
- Add up the balances on all your credit cards.
- Add up the credit limits on all your cards.
- Divide the total balance by the total credit limit.
- Multiply by 100 to see your credit utilisation ratio as a percentage.
For instance, if your credit card currently has a balance of £300 and a credit limit of £1,000, your credit utilisation rate is 30%.
» MORE: What affects your credit score?
2. Missing payments
Late or missed repayments can cause your credit score to go down. This is because any late or missed payments are recorded on your credit report and can be seen by other lenders if they do a hard credit search.
Lenders can be more reluctant to approve applications from customers with missed repayments on their credit files because it suggests there is a risk that you won’t be able to pay off your debt.
If you miss several payments your lender may place your account into ‘default,’ which can be more damaging to your credit score. Your lender may take more serious action if you don’t repay. It could apply for a county court judgment (CCJ), which is a legal order requiring you to repay them. They may also send debt collectors to your home to collect payments or assets that cover the value of your debt.
Missing payments and defaults stay on your credit report for six years.
» MORE: How to get out of debt
3. Having a CCJ, IVA or declaring bankruptcy
Your credit score will be negatively impacted if you have declared bankruptcy, have a CCJ against you, or have an individual voluntary arrangement (IVA).
Lenders are less likely to approve your credit application if you have any of these in your credit report. This is because they indicate that you’ve struggled to manage your money in the past, so lenders may think there’s a greater risk that you won’t be able to pay them back.
As with missed payments and defaults, CCJs, IVAs and bankruptcy stay on your credit report for six years.
But remember, it’s never too late to clear your debt. Paying off any outstanding CCJs or credit agreements shows lenders that you are taking control of your finances and may improve your credit score in the long run.
4. Applying for too much credit
Making too many credit applications in a short space of time could damage your credit score. When you apply for new credit, most lenders will run a hard search to look at your credit report and decide whether to approve your application.
Most hard searches are recorded on your credit report for around 12 months and are visible to other lenders. Typically, lenders view lots of credit applications in a short space of time as a sign that you are facing financial difficulty and may be unable to afford repayments, increasing your chances of being rejected for credit.
Try to space out and limit the number of credit applications you make. Experian says you should aim to make fewer than two or three applications every couple of months, and crucially only apply for credit if you need it. It is also worth using an eligibility checker before applying for new credit.
Eligibility calculators check your credit history using a soft search, which is not visible to lenders. They calculate your chances of being accepted for products, such as credit cards and loans, using data in your credit report.
5. Opening a new account
Opening a new credit account may cause your credit score to fall temporarily, but it is likely to recover quickly.
However, setting up lots of new accounts at the same time may cause longer-term damage to your credit score because this may signal to lenders that you are struggling financially, which may affect your ability to repay.
6. Closing an old account
Older accounts are considered more favourably by credit reference agencies. This is because successfully managing a credit account over a longer time indicates that you could be a reliable borrower.
Closing accounts you have had for a long time may cause your credit score to fall because it brings down the average age of your credit accounts.
The total credit limit across all of your accounts may also decrease when you close an old account. So, even if you spend the same amount of money on your credit card, you may end up using a larger portion of your overall credit limit. Using a high proportion of your credit limit could negatively affect your credit score, and it could indicate to lenders that you are too reliant on borrowing and may not be able to afford the repayments.
7. Financial associations
If you are financially linked to someone with a poor credit history, your credit score may go down. Once you take out shared credit with another person – for example, a joint mortgage or a joint current account – you become financially linked to each other as you will both be liable for the whole debt even if you didn’t spend the money. This is also known as a financial association.
When you apply for new credit, a lender may check the credit history of your financial associate too because they could affect your ability to make repayments.
If your financial associate has a poor credit history – for example, if they were declared bankrupt or have CCJs – this could increase the chances of you being rejected for credit and cause your credit score to take a hit.
It is important to review your financial associates and arrange to have anyone whom you no longer have an account with removed from your credit report. To do this, you will need to contact the credit reference agencies and provide proof that your financial association has ended.
» MORE: How does your credit score compare to the rest of the UK?
8. Mistakes on your credit report
Mistakes on your credit report, such as typos in your name and address or outdated address information, can cause your credit score to go down. This is because the simplest error can make it harder for lenders to verify your identity.
Your credit application may be delayed if lenders have difficulty proving who you are. And some companies may refuse your application altogether if the details don’t match up.
You can update your name and address on all of your credit accounts by contacting each of your lenders, and then it should be automatically updated on your credit report.
It is important to look out for errors in your payment history too. Sometimes missed payments or defaults may be recorded on your file by mistake. You can raise a dispute with the credit reference agency to get this corrected. They will investigate the issue and decide whether it can be removed from your report.
9. Moving address frequently
Some lenders may view frequent changes in address as a sign of financial instability. This may affect your chances of being approved for credit and could affect your credit score. Maintaining the same address, where possible, could help prove that you are a reliable borrower who can afford to keep up with repayments.
However, you can’t always avoid moving home. The most important thing is to keep your account information up to date. Ensuring that you have the right details across your accounts will help reduce any further damage to your credit score.
For example, your credit score may be affected if you don’t update your address on the electoral register after you move house.
10. Fraudulent applications
As well as the distress that fraud can cause, it can also have a devastating effect on your credit score.
If someone successfully opens a credit account in your name, you can become responsible for their credit actions. Most criminals disappear with the money they’ve stolen and leave their victims with unpaid debt that could damage their credit scores.
Regularly checking your credit score can help you spot fraudulent activity.
It is important to act quickly if you think you’ve fallen victim to identity theft. You should contact the banks or lenders involved as soon as possible, so they can investigate.
You should also report the incident to Action Fraud, which offers advice and helps prevent other people from falling victim to it.
It is also worth alerting the credit reference agencies about any fraudulent activity, so they can investigate and have them removed from your credit report.
Should I worry about my score going down?
It’s normal for your credit score to fluctuate slightly from time to time due to life events such as moving address, opening a new credit account or closing an old one. In these cases, it’s best to wait and see if your credit score goes up again after one or two months.
If you notice a dramatic decrease in your credit score, it’s important to investigate as it could be caused by a more serious issue. Checking your credit report in more detail will help you find what may be causing your credit score to dip.
Any errors on your credit file should be reported to the credit reference agencies immediately to help resolve the issue as soon as possible. Fraudulent activity should be reported to Action Fraud.
» MORE: How to check your credit score
How long does it take for your credit score to go back up?
Improving your credit scores is a marathon, not a sprint. If your score is low, it can take months of consistent positive actions (such as making payments on time) to build it back up. How long your credit score will take to improve depends on how seriously your credit score has been damaged.
Typically, it shouldn’t take long for minor dips in your credit score to go up, for example, if you have seen a decline due to opening a new credit account.
But for more serious decreases, for example, if you have a CCJ or defaulted on repayments it may take longer before your rating improves. And although that damage will stay on your credit file for six years, it should affect your credit rating less over time.
Focusing on getting your finances on the right track by using credit responsibly and making repayments on time should help your credit score eventually go back up.
Image source: Getty Images
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