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Why your credit score has gone down

Has your credit score gone down? Find out why.

08 November 2022Lloyd Smith 5 min read
Why your credit score has gone down
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Your credit score changes over time. While an increase may delight you, an unexpected drop may also surprise you. However, there is no need to be alarmed as credit score drops are often temporary and can be recovered over time.

The calculation of a credit score makes it difficult to understand what caused a drop in the first place. As your credit score is based on your credit report information, an unforeseen drop can be due to a change in your credit report. Even the smallest change can make credit scores fall. This is why it’s a great idea to check your credit score regularly.

There are a number of reasons why scores drop, including late or missed payments or there was a change in your limit. Credit report inaccuracies and identity theft can also cause a drop in credit scores. Here are a few reasons why you may have a lower credit score.

Your credit score is important for your financial health and future.

Credit scores are used by lenders to determine how likely you are to repay a loan that you borrow, whether it’s a home loan, car loan, business loan, personal loan or a credit card. It plays a role in influencing your rates and the terms of the loan.

Your credit score is calculated based on a variety of factors, including your payment history, how much you owe, the length of your credit history, what type of credit you have and any new credit that has been added. Any of these factors can affect the change in your credit score.

For more information read: Understanding Credit Scores and Reports

Sometimes your credit score can change based on factors that are out of your control, however, your actions and behaviour can influence your credit score.

Here are some factors that can influence your credit score and explain why it might have changed.

Late or missed payment

Your payment history is the most influential factor of your credit score.

If your payment is only a few days late, it is unlikely that it will show up on your credit reports. However, if payments are over 30 days late, your issuer will report the misdemeanour to the major credit bureaus. It is likely that your credit score will be negatively impacted. If the payment is more than 60 or 90 days late, your credit score may drop even further.

Any late or missed payments will be recorded and remain on your credit report for over 5 years.

Ensure your payments are up to date and on time to maintain a good credit score. Consider setting up automatic payments so you will never miss a payment again.

Expensive purchase

Credit cards are convenient for making expensive purchases because you do not need to pay the full amount upfront. However, having high credit card balances will result in a higher credit utilisation rate (CUR) which will be reported to the credit bureaus.

The utilisation rate, also known as your debt-to-credit ratio, measures the amount of credit you have used to the amount you have available. It is ideal to have a low utilisation rate, as using too much of your limit indicates that you might pose a financial risk to credit card companies. It is recommended to keep your credit utilisation low, ideally below 30%, with some suggesting below 10%, to have an ideal score.

Before charging a large purchase to your card, check that you can pay it off in total before the billing cycle ends. Having a high credit card balance can also incur a lot of interest.

Something fell off your credit report

Derogatory marks and missed payments will not stay on your credit report forever. The bigger the age for those marks, the less impact they have, so you may notice your score will change over time if your behaviour is consistent.

Late payments will remain on your report for over 5 years, whereas derogatory reports like bankruptcy, will remain on your report for up to 10 years. As your score recovers over time, these marks will fall off your report and you may see an increase in your score.

Application for a new credit card, loan or mortgage

When you apply for a new line of credit, the lenders will request a copy of your credit report to determine your eligibility and reliability. To determine whether they will lend to you, they will consider your payment history, the types of credit you have and your credit usage.

Every time you authorise someone to check your credit history, a hard inquiry is recorded on your report. This can affect credit scores for up to two years.

Over time, it is natural to collect numerous hard inquiries. Though if you apply for too much credit too quickly, it can negatively affect your score and the likelihood of lenders approving your new credit.

While it depends on the number of hard inquiries you accumulate, it can cause a drop in your score for a short period of time. Any effect on your credit will disappear within a year.

Closed or cancelled a credit card

Closing or cancelling a credit card can cause a drop in your score.

When you close a card, it decreases your available credit. The length of your credit history makes up a portion of your score, which is why it is recommended to start building credit when you are younger. The longer you can prove you have had credit, the better it is reflected in your credit score.

Another consequence of closing a credit card is that it brings down the average age of your accounts. This means if you do not reduce your spending, your CUR will increase.

Unless the card has a costly annual fee that you cannot afford, or it encourages you to spend more money, it is worth considering keeping these credit accounts open to maintain your credit history length and your limit.

Paid off a loan

Instalment debts, such as student loans or a mortgage, can negatively impact your credit.

Having a credit mix makes up a portion of your score and it is important to show that you can manage different kinds of debt.

This should not deter you from paying off your loans for the sake of your credit score. You can still have a strong score without having a variety of credits.

Credit limit decrease

A credit limit decrease can increase your credit utilisation ratio and have a negative impact on your credit score.

For example, say you have a credit limit of $10,000 and you have a balance of $3,000. In this instance, your credit utilisation ratio is 30%. If your limit was lowered to $6,000 by a credit card issuer, your balance remains unchanged, however your utilisation ratio would be 50% instead of 30%. This may cause your score to drop.

Credit card issuers determine your credit limit based on a number of circumstances, including your income, credit history, credit scores and current debt-to-income ratio. If you do not use your card frequently, miss a credit card payment or pay late, your credit issuer may lower the credit limit.

If you are concerned about your credit limit being too low, you can request a credit limit increase from your issuer, or open a new credit card account.

Identity theft

It is possible that your credit score dropped due to theft, where someone has used your identity to apply and open different credit accounts in your name.

One way of identifying whether someone has stolen your identity is to monitor credit reports and credit score regularly for any suspicious activity.

There are ways to reverse any damage incurred to your score.

If your score has been compromised due to identity theft, place a fraud alert on your credit file. You may also want to consider freezing your credit to restrict any access to your credit profile.

It can be stressful to see a drop in your credit score, but it does not have to be permanent.

By utilising the necessary steps to identify the cause of the drop, you can then take action to improve your credit score.

Whether it is implementing auto pay to ensure timely payments or correcting an error in credit reports, these decreases are only temporary if you put the right steps in motion.

Having an excellent credit score will save you hundreds of thousands of dollars over the course of your life.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.