We explore seven common reasons why your credit score might have dropped and what you can do to pick it back up again.
Understanding why your score may have gone down is a great way to help you decide what to do next. It can also help you anticipate when your score might drop again in the future, so you're not hit with a nasty surprise.
Put simply, your credit score can go down if a lender reports any 'negative' information to the credit reference agencies (CRA). If the new information the lender reports to the CRA makes you seem like a less reliable borrower, it can cause your score to drop.
Here are seven possible negative factors that could be the reason behind your score going down:
1. Missing or late payments
It’s probably no surprise that paying late or missing a payment on a debt can negatively impact your score.
However, just one late payment, will have less of an impact on your credit score than if you always miss payments.
That's why, even if it's really late, it's always worth making every payment. The longer you leave it to pay a missed payment, the bigger the dent it could make on your credit score. If you’re more than 30 days late making a payment, it’s likely that you’ll see your score drop even more.
2. An account has gone into arrears
If you miss multiple payments on a debt, your account may eventually go into arrears (sometimes known as a default). This means the lender has decided you are not going to pay back your debt. At this point, the lender has ended the agreement you have with them, and can take further action to collect the debt.
When this information gets added to your report by the lender, it may have a significant negative impact on your score.
3. A spike in how much credit you use
Your total available credit limit is the amount you’re able to borrow across your credit accounts. (This normally just means credit cards, since loans and mortgages don’t have a flexible credit limit).
With your credit limit, it’s all about balance. Using too little (or no) credit could harm your score, as you’re not able to prove to lenders how you manage credit. However, using too much of your credit limit could suggest to lenders that you'd struggle to repay any new debt. This can cause your credit score to drop.
It’s recommended that you try to keep your credit usage below 30% of your total credit limit.
4. Opening a new line of credit
If you’ve welcomed a new line of credit to your collection, you might be surprised to see your credit score has dropped. There are two reasons why this can happen:
When you apply for credit a lender will carry out a ‘hard search’ or a ‘credit application search’ on your report. This type of search is recorded on your report and it can negatively affect your credit score. If you’ve applied for several lines of credit in a short space of time, this may further impact you score. This is because it can give the impression to lenders you’re too eager for credit, which may put them off. (That’s why it’s always best to use an eligibility checker, such as the one on your ClearScore account, before applying for credit).
When you take out a new line of credit the average age of your credit accounts will decrease. This may cause your score to go down as lenders tend to prefer seeing older credit accounts. This is because this behaviour suggests stability, which helps prove to lenders that you're a reliable borrower, and a lower credit risk. Once your account gets older and the average credit age on your report goes back up, your credit score should build back up again. So, applying for credit can cause your score to drop slightly at first. However, if you pay back your bills on time and in full, and keep your credit usage in check, the chances are your credit score will recover. It can even help it to improve over time.
5. Settling a financial agreement in court
If you declare yourself legally bankrupt or are issued with a County Court Judgement (CCJ) or an IVA (Individual Voluntary Arrangement) it can significantly harm your score. This is because it tells lenders you have failed to repay debt in the past, and you might be a risky person to lend to.
6. Closing an old account
If you’ve recently closed an account, your score might drop. If the account was quite old, then closing it can cause the average age of your accounts to fall. Sometimes your score may follow suit. Closing an old account can also mean you have less credit available overall. If, by closing the account it pushes your credit usage over the 50% level, then it could negatively impact your score.
7. Moving address regularly
Lenders may see frequent address changes as a sign that you're not in a particularly stable position. Lenders prefer to see stability as it can imply that you'll be more likely to pay them back. So, if they see something on your report that suggests the opposite, it can affect your score.
How much your score changes depends on the overall picture of your credit report
Credit scoring isn’t one size fits all. The impact of certain changes to your report will have a different effect for everyone. The impact on your score will depend on what your report looks like as a whole.
So if you miss a payment but have a good credit history, it’s not likely to lower your score significantly. However, if you have a history of managing your debt poorly it could have a bigger impact.
Should I worry about my score changing?
If your score has dropped by a large amount it’s worth double checking all the information in your report is showing correctly. If you notice any errors, you can report them straight to Equifax.
If you have noticed a minor score drop, it may be useful to wait and see how your score changes over the next 1-2 months. This will let you see whether this is the start of a downward trend. Alternatively, you may find your score goes back up in the following months.
It might not be a famous saying, but what goes down can go back up. A decrease in your score doesn't have to be permanent. Check out our list of ways to improve your credit score, or try out our personalised Coaching programmes, so you can start working to build it back up again.