Written by: Andy Townsend
Head of Marketplace Distribution, Consumer
20th January 2022
When it comes to personal finance, your credit score can play an important role in a lender’s decision to offer you credit. It allows lenders to determine whether you qualify for products such as a credit card, loan, or mortgage.
Having a strong credit history could help improve your chances of being accepted for credit.
Credit scores can change all the time so if yours has dropped, there could be a number of factors that caused it. Your credit score is always being assessed in alignment with any financial decisions you make.
Your credit score can go down when credit reference agencies are informed of any ‘negative’ information by lenders you’re associated with.
But what is ‘negative’ information?
This tends to be anything that could make you seem to be a less reliable borrower. Some of the main reasons your credit score goes down might include:
Of course, there are many factors that can affect your credit score, but these are some of the more common ones.
We outline these eight possible reasons below.
Before opening a new line of credit, a lender will carry out a hard credit check on your report. A hard credit check will leave a footprint visible to other lenders and can impact your credit history. Before you apply, some lenders may offer the option to carry out a soft search that does not impact your credit report, so you can see how likely it is that you’ll be accepted. It is then only when you formally apply for the credit that the hard search is carried out.
A new line of credit could affect your score in the short term. But as long as you’re able to make the regular payments in full and on time, your credit score should soon recover. However, if you try to open too many lines of credit over a small period, your credit score won’t have time to recover.
It’s the same principle as explained in reason 1. Multiple attempts to get new credit can be reflected in the number of searches lenders will run to get an insight into your credit background.
If you make lots of credit applications in a short space of time that require hard searches, it could give the impression that you’re too keen to borrow. This can cause lenders to question your financial circumstances.
So, if you find yourself in this situation, it might be worth waiting until your credit score recovers and search for alternative ways to boost your finances in the meantime. To avoid unnecessary searches, only apply for credit when you need it and can afford it. It’s also a good idea to focus on credit that you have a good chance of being approved for. Alternatively, you can choose a provider who will carry out a soft search. This will help you to find out the likelihood of being accepted and allow you to shop around for the right option without impacting your credit rating.
This is one of the more obvious reasons why your credit score might have dropped.
When it comes to maintaining your credit score — stability and reliability are critical. Lenders measure these by checking you’ve made all of your required payments on time. Even just one missed or late payment can negatively impact your credit score, so it’s important to keep on track with your payments.
Your credit score is always under scrutiny, so you should always aim to make your payments in full and on time every month.
If you applied for a payment deferral with your lender before 31 March 2021 due to the Coronavirus pandemic, this may be reflected differently on your credit report. However, if you had previously paused your payments for six months, any further reduction or payment deferral is likely to be visible on your credit report. For more information, see Experian’s guide on payment deferrals.
If you have any queries regarding payment deferrals and how it affects your credit report, talk to your lender.
Other negative markers that can affect your credit score include having previously declared bankruptcy, being subject to a County Court Judgement (CCJ), or being the victim of identity theft.
Expensive sums on your credit card can have an impact on your ‘credit utilisation ratio’. Your credit utilisation ratio is calculated based on the total amount of credit across all balances divided by the total credit limit across all of those accounts.
Maxing out your credit limit or a spike in your credit utilisation ratio can show instability — and many lenders and credit reference agencies will take this into account. The lower your credit utilisation ratio remains, the better as it indicates that you’re doing a good job of managing your financial responsibilities and not overspending.
Lowering your credit limit can have a negative effect on your score. This is because your credit utilisation will go up even if your spending remains the same.
Credit utilisation refers to the amount of credit you have used compared with how much credit you have been offered by a lender. Your credit utilisation ratio is the amount you owe divided by your credit limit.
So, if you normally spend £1000 of your £5000 credit limit, you have a 20% credit utilisation rate. But if your credit limit was reduced to £2000, your credit utilisation rate would suddenly increase to 50%.
Many people lower their credit limit on credit cards if they feel like they are not going to use it. This can be a sensible option if you’ll struggle to make repayments if you max out your limit. However, this can cause your score to drop. So it’s worth considering whether you need to reduce your credit limit before you do so.
If you’ve noticed a slight dip in your credit score, recently closing an account could be the reason why. Cancelling a credit card, for example, could increase your credit utilisation ratio as it could reduce your overall available credit.
That being said, closing an old account may still be right for you if you want to responsibly limit the amount of credit you can use. However, it may be worth being careful about how you do it. Keeping hold of long-held and well-managed credit accounts can improve your score with some lenders as it shows you’ve been a reliable borrower in the past, which may suggest you’re likely to keep up with your repayments.
It’s also important that you make sure you’ve paid off any outstanding balances before trying to close an account as this can lead to missed payments, further affecting your credit score.
This is not uncommon — and is reasonably easy to fix.
Your credit report has a massive influence on your credit score — and therefore your ability to get credit. As a result, it’s important to make sure it’s error-free and up to date. Inaccurate information can be detrimental — leaving you with a lower credit score than you should have. For example, if your credit report shows you living at a different address to where you’re registered to vote, your score could be negatively affected.
If you suspect this to be the case, you can access and check your credit report via one of the many credit reference agencies available (you can usually do this for free). They all have procedures in place to deal with complaints regarding inaccurate information and are willing to make changes if needed, so it’s definitely worth a check.
While there are obvious advantages to having joint accounts and shared credit responsibilities, there are also some drawbacks.
In the context of credit scoring, a joint account means that you’ll be ‘co-scored’.
This is only an issue if your partner has a weaker credit history than you (and vice versa). If you both have a good track record and continue to maintain this while you hold your joint account, neither of your credit scores should drop.
But when it comes to ‘co-scoring’, the poor spending behaviour of one person can negatively affect the credit score of the other. So, it’s worth bearing this in mind when you make a joint financial commitment — whether that’s opening a bank account or taking out a mortgage.
Now that you know more about what causes your credit score to drop, you can be proactive and take steps to maintain — and even improve — your score.
Regularly monitoring your credit score is a good place to start. This can help you determine whether your spending behaviour is having a negative impact. It might even be worth saving this page in your browser bookmarks to refer back to if you notice any unexpected fluctuations in your credit rating.
Monitoring can help you recognise when you need to change your approach to ensure you maintain a healthy credit score — whether that’s an improvement in keeping up with payments or keeping your credit usage to a minimum. It’s especially important to keep track of it if you’re anticipating applying for credit in the near future.
From paying your bills on time to simply making sure you’re on the electoral roll, there are a variety of things you could do to improve your credit score. You can find out more tips in our guide on how to maintain a healthy credit score.