11 Reasons Why Your Credit Score Has Gone Down
There are many reasons why your credit score might go down. Some may only cause temporary dips, while others may take longer for your credit score to recover. Find out some of the common causes of your credit score going down and how you can improve your credit history.
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 savings accounts you no longer use may have a minor impact on your credit score, so it's worth waiting to see if your rating goes up after one or two months.
However, you should contact each credit reference agency directly for more details about significant drops in your credit score as it could be linked to more serious financial issues, such as having a county court judgment (CCJ) on your file or 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 11 common reasons why your credit score has gone down and steps you can take to improve your credit rating.
Using too much credit
Using high proportions of the credit available on your credit cards or going over your credit limit can cause your credit score to drop. This is because lenders use your credit usage, which is also called your credit utilisation rate, to decide whether you are a responsible borrower.
Try to keep your credit utilisation rate below 30%. Calculating your credit utilisation is simple. All you have to do is divide your credit card limit by the amount you spend each month. For instance, if your credit card limit is £1,000 and you use around £300 a month, your credit utilisation rate would be 30%.
Late or missed repayments can cause your credit score to go down. Any late or missed payments are recorded on your credit report and can be seen by other lenders if they do a credit search.
Most lenders are 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 enforcement agents to your home to collect payment or assets that cover the value of your debt.
Missing payments and defaults stay on your credit report for six years, so it may take a while for your credit score to recover.
Having a CCJ, IVA or declaring bankruptcy
Your credit score will be negatively impacted if you have declared bankruptcy, have a county court judgment against you, or an Individual Voluntary Agreement (IVA).
Lenders are less likely to approve your credit application if you have any of these in your credit report. This is because they show you haven’t been great with managing money in the past. And there is a greater risk 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 agreement shows lenders that you are taking control of your finances and may improve your credit score in the long run.
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 not be able to afford repayments. This increases your chances of being rejected for credit, which could cause your credit score to go down.
Try to limit the number of credit applications you make to one every three months. 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.
Opening a new account
Opening a new credit account may cause your credit score to fall. This is just a temporary change and your credit score should 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.
Closing an old account
Older accounts are considered more favourably by credit reference agencies. Successfully managing a credit account over a long period of time shows that you are 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 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 more than 30% of your credit limit could negatively affect your credit score.
High credit usage indicates to lenders that you are too reliant on borrowing and may not be able to afford repayments.
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. 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 county court judgments (CCJs) – this could increase the chances of you being rejected for credit and cause your credit score to take a hit.
It is really important to review your financial associates and remove any that you no longer have an account with. You will need to contact the credit reference agencies directly to do this.
Not registering to vote
Your credit score might go down if you’re not registered to vote. Most lenders use the voting register to help confirm a customer’s identity and combat fraudulent activity.
Not being registered to vote can slow down the application process and, in some cases, you may be rejected for new credit.
You can register to vote online on Gov.uk. Once you have checked that you are eligible to vote, all you’ll need to do is complete an online form, which usually takes a few minutes. If that’s not possible, you can also register to vote via post.
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 through each provider.
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.
Moving address frequently
Some lenders 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.
An increasing number of people are being affected by identity fraud, which can 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 can look into the scam and help 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.
Image source: Getty Images
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more