If you’re in the habit of tracking your credit score frequently, you are on the right path towards bettering your credit score. Monitoring your credit score helps you to keep a check on what’s reported in your credit report, and watch out for mistakes or misinformation that are reflecting poorly on your credit profile.
While an increase in your credit score can get you excited, a drop in the score can get you equally alarmed. A decrease in the credit score is a fairly common experience, and it doesn’t always mean that you have done something wrong. A wide range of factors affect your credit score and some can cause a drop in your credit score.
In this article, we’ll talk about a few potential reasons why your credit score could’ve dropped recently. Here is a quick summary:
| Reasons for Credit Score Drop | Explanation |
|---|---|
| Missed a payment | Late or missed payments can significantly impact your credit score as it reflects poorly on your credit behaviour. |
| Applied for a new credit account | Applying for a new credit account results in a ‘hard enquiry‘ on your credit report, which can temporarily lower your credit score. |
| Made too many credit inquiries | Multiple credit enquiries can lower your credit score as it may indicate poor financial management or a desperate need for money. |
| Increased credit utilization rate | A credit utilisation ratio over 30% can lower your credit score as it indicates irresponsible financial behaviour. |
| Closed an old credit account | Closing old credit accounts can lower the average age of your credit accounts, which can negatively impact your credit score. |
You missed a payment on one of your credit accounts
Making a late payment on any of your credit accounts is a big no-no. Missed or late payments have a significant impact on your credit score and your overall credit health. Why are late payments such a big deal? Because if you prove that you can’t make your payments on time, you become a potential risk in the eyes of your lenders. Your credit score is a reflection of your credit behaviour.
Having said that, if one late payment has caused your credit score to drop, don’t panic. Continue making regular payments thereafter, set up reminders if required, and arrange for auto payments with your bank. Gradually, you’ll see a rise in your credit score.
You applied for a new credit account
Any time you apply for a new credit account, the potential lender sends an inquiry to the credit bureau. This inquiry is added to your credit report as a ‘hard inquiry,’ and it has the potential to cause a temporary drop in your credit score.
You made too many credit inquiries
In this case, the credit score dip is because of multiple credit inquiries. When multiple hard inquiries are added to your credit report, it can count against you. The potential lender will see you as a borrower who is poor at financial management and is in desperate need of money.
Your credit utilization rate has increased
Your credit utilization is how much credit is available to use at any given time. You can easily calculate your credit utilization by dividing your total outstanding balances by total credit limits and then multiplying it by 100. If your credit utilization ratio is less than 30%, you are a responsible borrower. If it’s more than 30%, it’s an indication that you have an irresponsible attitude towards finances and that lowers your credit score.
You closed an old credit account
The age of your credit accounts plays an important role while calculating your credit score. If you have old, well-maintained credit accounts, it reflects your maturity and experience in handling credit accounts. That’s a big plus.
If you close any of your old credit accounts, it immediately lowers the average age of your credit accounts, thus lowering your credit score.
Bottom line
As illustrated above, there are a number of factors that may lower your credit score. If you want to maintain a good credit score, you need to work towards being a responsible borrower consistently. Make your payments on time, raise a dispute with the credit bureau if there are any mistakes in your credit report, and keep your credit utilization below 30%.