Has your credit score gone down? Find out why.

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 may 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 may 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.

Why your credit score matters

Your credit scores are 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 scores are 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. However, the exact weighting of these factors differs between credit bureaus. In New Zealand, the main credit bureaus Centrix, Equifax NZ, and illion use proprietary scoring models, and the specific weightings are not publicly disclosed. Any of these factors may affect the change in your credit scores.

Related reading: Understanding Credit Scores and Reports

Why has my credit score gone down?

Sometimes your credit score can change based on factors outside your control; however, your actions and behaviour may influence it.

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

You paid late or missed a payment

Your payment history is an important factor in your credit score.

If your payment is only a few days late, it may not immediately affect your credit file, though ongoing lateness could show up in monthly payment status updates. However, if payments are over 30 days late, your issuer will typically report the late payment to credit bureaus such as Centrix, Equifax NZ, or illion. This may negatively impact your credit score. If the payment is more than 60 or 90 days late, your credit scores may drop even further.

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

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

You made an 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.

The utilisation rate, also known as your debt-to-credit ratio, measures the amount of credit you have used compared to the amount you have available. It is ideal to have a low utilisation rate, as using too much of your limit may indicate financial risk to credit card companies. While there is no formally mandated threshold in New Zealand, it is generally recommended to keep your credit utilisation below 30% of your available credit limit.

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.

You applied 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 may affect your credit score, though the duration and impact vary depending on the credit bureau and its scoring model.

Over time, it is natural to collect numerous hard inquiries. However, if you apply for too much credit too quickly, it may negatively affect your score and the likelihood that lenders approve your new credit.

While it depends on the number of hard inquiries you accumulate, it may cause a drop in your score for a short period of time. The duration of any effect on your credit varies depending on your credit bureau and its scoring model.

You 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 credit utilisation 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.

For more information, read: What Credit Score do you need to get a Credit Card

You paid off a loan

Instalment debts, such as student loans or a mortgage, may affect your credit score, though the impact depends on how you manage these accounts.

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 credit.

Your Credit limit decreased

A credit limit decrease can increase your credit utilisation and may 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 is 30%. If your limit was lowered to $6,000 by a credit card issuer, your balance remains unchanged, and your utilisation would be 50% instead of 30%. This may cause your score to drop. While there is no formally mandated threshold in New Zealand, keeping your utilisation lower is generally considered good practice by credit bureaus.

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.

You may have suffered from identity theft

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

One way of identifying whether someone has stolen your identity is to monitor your 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, contact the bureaus to dispute fraudulent accounts and consider placing a ban on further credit reporting. You can request a suppression notice with the credit bureaus to restrict access to your credit file.

How Do I Repair My Credit Score?

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

By identifying the cause of the drop, you can then take action that could help improve your credit score over time.

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 a good credit score could help you access better interest rates and more favourable lending terms, though approval and rates depend on multiple factors, including current lending criteria and your financial circumstances.

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