It’s never a good feeling to see that your credit score has dropped since you last checked. But being able to quickly identify the cause can help you take the right steps to get it back on track.
Your credit score can drop due to a variety of reasons, including late or missed payments, changes to your credit utilisation rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts. And don’t forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Let’s look at the main reasons why your credit score might have dropped, and how you can address each of them.
Late or missed payment
Payment history is a critical component of your credit score.
If you were only a few days late on a payment, it’s unlikely to show up on your credit report. But once payments are more than 30 days late, card issuers will report them as delinquent to the credit reference agencies. If this happens to you, you can expect your credit score to take a hit. And if the payment is reported as being 60 or 90 days late, your credit score could fall even further.
Keeping track of payments can be difficult, especially if you have multiple credit cards and loans. If you’re worried about bills getting lost in your inbox, setting up Direct Debits could be a smart move.
Derogatory mark on your credit report
Derogatory marks on your credit reports indicate that you didn’t pay a loan as agreed in some way. Here are a few reasons why you may have a derogatory item on your credit report.
- Late payment
- A defaulted account
- Bankrupcy
- Individual Voluntary Arrangement (IVA)
- Trust Deed (Scotland only)
- High Court or County Court Judgement
- Debt Relief Order
- Administration Order
Unlike hard credit searches, derogatory marks don’t fall off your credit report in two years. Instead, they’ll typically remain on your report for at least six years.
That means your credit score could be negatively affected by a derogatory mark for that period. But the good news is that the effect of some derogatory marks can taper down over time.
Additionally, you may be able to get certain derogatory marks taken off your credit report. If you see a derogatory mark on a report, first verify that it’s legitimate. If it’s not, contact the credit reference agencies to dispute it.
Change in credit utilisation rate
Your credit utilisation rate (how much of your available credit you use) is another important factor in determining your credit score.
If you spent more than usual last month (because of a large purchase, family holiday or other reason), it will increase your credit utilisation rate. How far will your score drop because of it? The effect will vary, depending on how much your proportion of credit used went up. To keep your credit score steady, we recommend that Credit Karma members keep their credit utilisation rate below 25%.
Imagine that you have a £10,000 credit limit, of which you typically only use £1,500 (15% credit utilisation rate). If your spending one month increases to £2,000, your utilisation rate will still be solid overall at 20%. But if your spending suddenly increased to £5,000 (50% credit utilisation rate), your score could start showing a decline.
Reduced credit limit
Why can a lower credit limit cause your credit score to drop? Because your credit utilisation rate will go up even if your spending stays exactly the same.
Consider this example. You typically spend £1,500 of your £7,000 credit limit for about a 20% credit utilisation rate. That’s good. But then imagine that your credit limit is reduced to £5,000. In that case, your credit utilisation rate would instantly jump to 30%.
If your credit score takes a hit after a credit limit reduction, take a close look at your utilisation rate. You may need to reduce your credit card spending to improve your score.
You closed a credit card
There are multiple reasons why closing a credit card can cause your credit score to drop. First, when you eliminate a credit card, it reduces your available credit. So, if you don’t reduce your spending in kind, your credit utilisation rate will go up.
The second reason closing a credit card could hurt your credit score would be if it hurts the length of your credit history. The older an account, the more it could affect your “age of credit” credit factor when you close it. Before you close your oldest credit account, consider whether it’s absolutely necessary.
You’ve recently opened, or applied for, multiple accounts
When you open several accounts in a short period of time, you represent more of a risk to lenders. For this reason, your credit score may drop if you’ve had several hard credit searches placed on your credit report recently.
It’s important to point out that checking or monitoring your credit with tools like Credit Karma doesn’t affect your score because it only results in a soft credit search.
Mistake on your credit report
So far we’ve assumed that your credit score dropped because of accurate information on your credit reports. But what if that’s not the case?
Your account providers can make mistakes too. That’s why it’s important to check your credit reports to keep an eye out for errors.
If you find a mistake on your credit report, you should dispute it straightaway with the credit reference agencies and with the reporting lender.
You were the victim of identity theft
Finally, let’s address what might be the most frightening reason for a drop in credit score: Someone could have stolen your identity and applied for (and opened) accounts in your name.
If you discover that an impostor is using your identity, don’t panic. There are actions you can take to help reverse the damage it may have caused to your credit score.
But how do you spot identity theft in the first place? One step to consider is credit monitoring. Keeping a close eye on your credit score and credit report may help you catch suspicious activity faster than if you’re not regularly monitoring your accounts.
If you’ve been a victim of identity theft, you’ll likely want to make a recovery plan. Placing a password on your credit file could be a good place to begin. You can file a Notice of Correction with the credit reference agencies and use this feature to add a password to your credit report. This way, lenders carrying out a search can verify your identity using your password.
You could also consider whether a Cifas marker could add some protection. If you have a Protective Registration with Cifas, lenders and other organisations will be informed that they should carry out additional checks on any applications using your details.
Next steps
Seeing your credit score drop may cause you some anxiety. But if you take the steps necessary to identify the factors that led to the decrease, you’ll often find that you can take action to get your score back up.
Whether it’s setting up a Direct Debit so you don’t miss a payment, disputing a derogatory mark or correcting a mistake on your credit report, these dips can be temporary if you put the right plan in motion.