If you’re wondering ‘why has my credit score gone down?’ you are right to be concerned. A low score can make it difficult to live in a world full of contracts, bills, and debt. Many people neglect or mismanage their credit only to come to an abrupt realisation that the high salary they worked for isn’t enough to secure a mortgage now they are finally ready to own. The road to improve your credit score can take years of consistent payments to lenders to prove your trustworthiness for the big 3 credit reference agencies: Experian, Equifax, and TransUnion. So the best time to work on it is yesterday. The next best time is now. If you’ve noticed your score go down here are the most common causes, how bad they affect you, and what you can do to get it back up.
Late Payment History
Problem: Your payment history is a crucial factor in determining your credit score. Late payments or missed payments on loans, credit cards, or other credit accounts can have a significant negative impact. It indicates a higher risk of defaulting on future payments. Delinquencies can stay on your credit report for up to six years and can significantly lower your credit score.
Severity: This has a significant negative impact on your credit score when reported to the credit reference agency. Although, many lenders will give you 30 extra days to make a full payment before proceeding. Missed days still don’t look good to anyone reviewing your spending history.
How to improve: Check your pay back period, usually it’s a specific date each month, and set up calendar reminders for payments to be paid near the due date. Save a separate emergency fund to cover those times when you don’t have the money to pay off your credit debt. Also, organise your bills to go out of your account just after payday to avoid bounced payments. This makes it easier to manage expenses through the month and cut back on non essentials when money is low.
High Credit Utilisation
Problem: Credit utilisation refers to the percentage of your available credit limit that you’re using. High credit utilisation, such as maxing out your credit cards, can make your credit score go down. It signals that you’re dependent on credit and may indicate financial strain.
Severity: Increasing your credit limit shouldn’t hurt your score but high credit utilisation aka maxing out spend could have a negative impact that becomes increasingly damaging to your reputation with recurring patterns of this behaviour.
How to improve: It’s generally recommended to only use up to 30% of your available credit limit to maintain a good credit score. Using less credit as a proportion of your total spending makes you look less risky to lenders and your credit score could go up as a result. So for example, if you want to borrow £250, set your limit to £1000.
Opening Multiple New Accounts
Problem: Frequent applications for new credit accounts within a short period can impact your credit score. Each application may result in a hard inquiry on your credit report, which can temporarily lower your score. It raises concerns about your financial stability and the potential for taking on too much debt. It’s advisable to be selective and strategic when applying for new credit.
Severity: Frequent applications for new credit can raise concerns about your financial stability and may have a negative impact on your credit score, especially if these applications result in hard inquiries. Each hard inquiry can temporarily lower your score.
How to improve: Don’t become reliant on credit to make payments or stack the same type of credit cards e.g. you get two similar cards from different companies with a £250 limit to secure a £500 loan. Instead, improve your credit score so lenders trust you with a higher debt limit. However, it is good to have a mix of instalment and revolving credit as it shows you can manage different types of credit for specific purposes. Revolving credit provides secured loans on a recurring basis that can be paid back without penalising your credit score. On the other hand, instalment credit is a one-off loan such as car loans, mortgage loans, and student loans.
Defaulting on Payments or Entering into Collections
Problem: Failing to repay a loan or credit account can lead to default or being sent to collections. Defaulting indicates a significant failure to meet your financial obligations, and being sent to collections suggests ongoing financial difficulties. Defaulted accounts or collections can make it challenging to obtain credit in the future.
Severity: Defaulting on payments or being sent to collections can have a severe and long-lasting negative impact on your credit score. It can stay on your credit report for up to six years.
How to improve: Don’t accrue large amounts of debt without budgeting how that will be paid back by a certain period. You are better off getting a second job or selling possessions than tarnishing your relationship with lenders who will make it impossible for you to get on the property ladder or even so much as a phone contract.
Bankruptcy or Individual Voluntary Arrangement (IVA)
Problem: Bankruptcy and entering into an IVA are formal processes to manage overwhelming debt. They have a highly negative impact on your credit score. Bankruptcy stays on your credit report for up to six years, making it extremely difficult to access credit during that time. An IVA, which involves a formal repayment plan, also has a similar impact on your credit score.
How to improve: All businesses come with high risk of failure. Having a fall back such as full-time employment or diversifying your income can help you stay on track of repayments to prevent a downwards spiral.
Errors or Inaccuracies on Your Credit Report
Problem: Mistakes or inaccuracies on your credit report can negatively impact your credit score. Incorrect information, such as accounts that don’t belong to you or inaccurate payment history, can skew your creditworthiness.
Severity: Errors or inaccuracies on your credit report can temporarily affect your credit score but it’s unlikely to suffer a steep drop. It’s important to regularly review your credit report and report any discrepancies to the credit reference agencies to have them corrected.
How to improve: Routinely reviewing your credit report and reporting any discrepancies to the credit reference agencies ASAP can help rectify errors and maintain an accurate credit profile.