There are a number of reasons why your credit score goes down. The credit score is not a permanent number which remains the same all the time.
There are many factors that cause fluctuation in credit score. Sometimes even good news like approval for a new credit card can also turn negative on your credit score.
A credit score can be built by using credit cards smartly.
Use a credit card only to an extent that you can afford to pay, pay your credit card balances in full on time, leave your oldest credit accounts open as it will help to increase credit.
Monitor your credit score. If you have noticed that there is a drop in credit score, there could be various reasons. Some of the reasons are listed below.
- Missed a credit card payment
- Missed a loan EMI payment
- Applied for the new credit card
- Bulk credit card purchases
- Credit limit reduced by bank
- Closed a credit card
- Inaccurate information on the credit report
- Credit utilization
- Loan payoff
Missed a credit card payment?
If you have not made the credit card payment it will not only drop your credit score but it will also get recorded in the credit report. Your payment history should be clean without any defaults. Just one late payment or payment miss will have a direct negative impact on the credit score. All your payments should be made on time.
Make a note of your payment dates and make payments timely. If the payment is more than thirty days past due, banks will inform credit bureaus regarding delinquency. This will result in dropping your credit score. If your payments are unpaid beyond 60 to 90 days then your credit score will drop even more. Records regarding your delinquencies are maintained for seven years. Any damage you create to your credit score will have an impact for a long period.
Missed a loan EMI payment
If you have insufficient funds in your bank account you may miss your EMI loan payment. Missing a loan EMI payment would affect your credit score. You would also incur high penalty charges for missing loan EMI payment.
Applied for the new credit card or loan
Credit history will be reviewed whenever you apply for a new credit card or loan.
Creditworthiness is ascertained from credit history.
Whenever you apply for a loan or new credit card an inquiry is conducted on your credit history. It will have a high effect on your credit score and your credit score reduces. If you already have a low score and credit inquiry is conducted then it has a hard effect which will remain up to two years.
If you repeatedly apply for a credit card or a loan even after loan rejection or if you applied for a new loan within a short period of previous loan approval. Your credit score will be reduced.
Bulk credit card purchases
If you plan to make any bulk purchases it can directly affect your credit utilization. Maximum credit utilization can have a direct impact on your credit score. Bulk purchases will drop your credit score and it indicates that you cannot make further purchases.
Do not always have the option of buying bulk through credit card, if you do so remember to utilize credit purchases below thirty percent. If you want the best credit scores then keep your credit card utilization below ten percent.
Always it best advised to know about the working of a credit card as it helps to reduce a lot of burden in managing a credit card.
Credit limit reduced by bank
The bank may reduce your credit limit if it is allowed in the credit card agreement. Reducing your credit limit will drop your credit score.
Example- If your credit limit was AED 10,000 and your utilization was 30 percent, which would be AED 3,000.
If the bank had reduced credit limit to AED 6,000 and still the balance on card remained 3,000 then your credit utilization would be fifty percent. This could cause a drop in credit score.
Closed a credit card
Think twice before you close your unused credit card. Your credit utilization will increase if you close your credit card account and it will also reduce the length of your credit history.
Once you close your credit card account the credit limit is removed from utilization ratio. This will have the capacity to reduce your credit score.
If you have unnecessary credit cards close your unused credit cards and make the best possible use of existing credit cards.
Inaccurate information on the credit report
Incorrect information on your credit report will cause a drop in your credit score. Keep checking your credit reports regularly. It is the best step to resolve inaccuracy. Mistakes happen very rarely and if incorrect information creeps into your credit report it will reduce your credit score.
Inaccurate information may come up because sometimes a lender may report wrong information or credit card holder may become a victim of a fraudster.
If you feel suspicious about anything regarding your credit card, immediately contact your bank and get things clarified as early as possible.
Credit utilization
Keep your credit utilization rate at thirty percent or less than that. Anything more than 30 percent of credit utilization can reduce your credit score.
The available credit on your credit card during a period of time is called credit utilization. You can find out credit utilization by dividing total credit balance by total credit limit, multiply with 100 and you will get the credit utilization percentage. This is regarded as a high impact factor as it gives an idea to the bank how you are managing your credit.
Loan payoff
If you have only one loan and paid off the loan your credit score might look less. If you suddenly increased your loan accounts then even that can show inconsistency and credit score can drop. It is always a best practice to first look at credit reports and then plan to close your loan accounts.
Ways to improve your credit score
Below are some tips you can follow to improve credit score
- Minimize your debt
- Reduce dependency on credit card
- Timely payment of utility bills
- Do not apply for many credit cards
- Spend responsibly
Click here to know about how to improve credit score
Take away
There are a number of factors that may cause a credit score to drop. It is a big responsibility to have a good credit score consistently. Have a check on your credit score periodically, keep credit utilization below thirty percent of your credit limit and resolve credit score issues.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
