Why has my credit score gone down?

Low credit score showing on document

Your credit rating or credit score can have a significant impact on your personal finance options – affecting whether you can apply for a mortgage, get a credit card, take out a loan, get a car finance deal or even start a mobile phone contract.

If you notice your credit score go down, it’s therefore natural for you to be concerned and wonder exactly what has caused the drop.

Knowing why your score may have gone down is useful as it not only helps you decide what to do next, it can also help you anticipate when your score could go down again so you can take the necessart steps to avoid it in the future.

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How credit scores can go down

To put it simply, your credit score can go down if a lender reports any ‘negative’ information to the main UK credit reference agencies (CRAs).

There are three main credit reference agencies in the UK – Experian, Equifax and TransUnion – who work with banks, building societies and other lenders to help them make quick and accurate decisions on how risky it is to extend credit to whoever is applying.

If a lender reports new information to the CRAs that makes it seem like you are a more ‘risky’ customer, it can cause your credit score to drop.

Below we have listed the most common reasons that could cause your credit score to go down.

1. Missed or late payments

One of the most important factors that make up your overall credit score is your payment history, so having missing or late payments on your file can negatively impact your score.

Having one late payment usually has less of an impact on your rating than if you regularly miss payments, so it’s always worth making each payment – even if it is really late. The longer you go without paying your missed payment, the bigger impact it will have and, if you go over 30 days late on a payment it’s likely to lead to a significant drop in your credit score.

2. The amount of credit you use goes up

Managing your available credit is key to maintaining a healthy credit score. If you suddenly start using a lot of the credit available to you, e.g. you use your credit card a lot for a particular month, it can cause your credit score to drop.

It’s all about balance when it comes to your credit limit – which is the total amount your able to borrow across all your credit accounts. Just as using too much of your credit limit can raise red flags with the CRAs, using too little could also have a detrimental effect as you are not proving that you are able to manage your credit effectively.

A good rule of thumb is to keep your credit usage at around 30% of your available credit.

3. Taking out more credit

When you apply for new credit the lender will carry out what is known as a ‘hard search’ or a ‘credit application search’ on your credit report. This search is recorded on your report, so the more searches that are carried out the bigger the impact on your credit score – especially if you apply for lots of credit arrangements in a short space of time.

Also, when you take out a new credit card or other line of credit it decreases the average age of your credit accounts. This can lead to your credit score going down as lenders prefer older credit accounts as they imply a certain level of stability and effective credit management.

If you previously had a good credit score but then noticed a drop after taking out new credit, you may well see it rise again over time as you pay your bills on time and manage your credit usage.

4. Having an account in arrears

If you have missed multiple payments on one of your accounts, the account may go into arrears – which means you have ‘defaulted’ on your debt and the lender has decided you are not going to pay it back. The lender has therefore ended the agreement they had with you and can take further action to collect the debt.

When this is added to your credit report it will likely lead to a significant drop in your credit rating.

5. Changing address frequently

Lenders like to see stability, as this implies that you are a reliable borrower and therefore less of a credit risk. If you change your address a lot then you could be viewed to be currently in quite an unstable position – which will be reflected in your credit score.

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