Seeing your credit rating dip can be frustrating and worrying, but there can be a simple explanation. You may need to wait it out, make a couple of small changes or learn to avoid something in the future. Alternatively, a more dramatic drop may require some long-term planning to repair. In this article, you can find the most common reasons why your credit score may have gone down and the steps you can take to resolve it.
Reason 1: Missed payments
Any late or missed repayments will be recorded on your credit file, which could damage your credit score. If you apply for a credit card, loan or mortgage in the future, that lender can see the missed repayments on your file when they run a hard credit check.
Having a missed or late repayment on your file may suggest to a lender that you are at risk of missing payments in the future or that you might not be able to pay off your debt. This would mean you are a higher risk, which would be reflected in your lower credit rating.
Reason 2: Applying for too much credit
Whenever you apply for a new credit card, loan or mortgage, the provider will run a ‘hard’ credit check. This leaves a mark on your credit file that future lenders will be able to see. Whether your application is successful or not, too many in a short period of time will start to add up. Eventually, any lender that runs a credit check will see that you have already applied for credit a significant number of times in the recent past and may decide to reject your application. This is because lenders view lots of credit applications as an indicator that someone is struggling to manage their money.
You can protect your credit score in a number of ways. One way is to spread out any new applications, limiting them to just one per month. Another way is to wait 12 months for hard searches to drop off your credit report or you could use an eligibility checker. These tools run a ‘soft’ search, which does not leave a mark on your credit file, but will still tell you how likely you are to be able to get the product you want.
Reason 3: CCJs, IVAs and bankruptcy
The eventual result of regularly missing payments will likely be a CCJ (County Court Judgement), IVA (Individual Voluntary Arrangement) or bankruptcy. Much like a missed payment, this would stay on your credit report for six years.
Having a CCJ, IVA or bankruptcy on your credit file will make it much harder for you to borrow money. Lenders will see that you have struggled to pay back what you have borrowed in the past and will be reluctant to lend to you because of the risk it could happen again.
Reason 4: Using too much credit
Spending on your credit card to the point that you are using a significant amount of your available credit can send your credit rating downwards. This is because spending too close to the upper limit of what you can afford to borrow suggests that you are not managing your money effectively. Lenders will look at your credit utilisation to judge whether you control your spending and are responsible enough to take on more credit.
Using around 30% of your credit limit should ensure your credit score is not affected by your credit card spending. This applies across multiple credit cards, so if you have one card with a £700 limit and another with a £300 limit, you should avoid allowing the combined balances to reach more than £300.
Reason 5: Closing an old account
Your old accounts are valuable for your credit rating, as a long-term financial relationship suggests you are a reliable borrower and managing your finances well. Closing an old account could dramatically affect the average age of your credit options, which could damage your credit score.
You could also inadvertently increase your credit utilisation, as you would be cutting an available line of credit. For example, if you have a balance of £300 on a card with a credit limit of £700 and a balance of £0 on a card with a credit limit of £300, your credit utilisation would be 30%. Were you to cancel the card with a £0 balance, you would lose that credit limit of £300 and your credit utilisation would jump to 43%.
Reason 6: Bad financial associations
Being financially connected to someone with bad credit could damage your credit rating. This connection could be through a shared current account, mortgage or any other joint financial product. It can also arise if you have acted as a guarantor for a loan.
When you apply for credit, the provider will be able to see the connection and may check the credit file of the other person. If they have bad credit, the lender may reject your application because it assumes you will need to step in if that person hits financial difficulty, making lending to you a riskier proposition.
You can check your credit file and see who is considered to be a financial associate. If you no longer have a relationship with that person, you can request for them to be removed.
Reason 7: Errors on your credit report
These are often relatively easy to spot and correct but can have a surprisingly significant negative impact on your credit report. A lender needs to be able to confirm your identity, so an outdated address, misspelt name or incorrect date of birth will make proving who you are much more difficult.
By checking your credit report, you should be able to easily identify any mistakes and report them to the relevant CRA (Credit Reference Agency) to be corrected. If the errors are on your credit accounts – for example your credit card provider still has a previous address as your current residence – you will need to contact that company directly.
Another mistake to look out for on your credit report is accounts, lines of credit or even missed payments that you do not recognise. You should contact the CRA to report any mistakes that need looking into. You may need to provide proof, such as a credit card statement, as part of the investigation.
Reason 8: Moving to a new address
Moving house frequently could be bad for your credit score. A lender could view a significant number of past addresses as a sign of financial instability. It may also mean you end up with inconsistent addresses across different financial products and the electoral roll.
This isn’t something you can do much about – other than prioritising getting on the electoral roll and updating your personal details once you move – and should not be something that puts you off moving, but don’t be surprised to see your rating dip slightly when you update your address. Do not be tempted to stick with an old address to avoid this, however, as that could cause more issues.
Reason 9: Fraudulent applications
Scammers and fraudsters can seriously damage your credit score. Even if it is no fault of your own, someone successfully opening an account in your name will leave you responsible – at least initially – for their use of that account. This could be racking up huge debts, opening multiple lines of credit or skipping important repayments.
Finance scams are becoming increasingly sophisticated and harder to spot, but you can protect yourself by making sure your accounts are as secure as possible and by monitoring your credit report for any suspicious activity you do not recognise.
If you do spot something, you should report it to the relevant bank or lender, the CRA that has recorded it and to the police through Action Fraud.
What to do if your credit score goes down
Sometimes a dip in your credit rating is nothing to worry about. You can expect it to fluctuate from time to time as you set up a new account, close one down or move home. Changes often only last a few months and your score should bounce back.
If you are dealing with a serious issue, such as a CCJ or IVA, you may see a more dramatic change in your credit rating. This will require time and patience to repair, but it is almost always fixable. There are steps you can follow to maximise your current score and to build a credit file that will help you grow your credit score. Over time, with responsible borrowing, you can build an excellent credit score and access a much wider range of credit options, including the best credit cards.
