If you’re not sure how credit bureaus work out your credit score, then you’re not alone. It might seem like random calculations go on behind closed doors, but there are understandable reasons behind seemingly sudden drops in your score.
When you notice your credit score go down and you have no idea why, think about any events that may have happened that a creditor might notice. Your score will go down when something has happened that, from the perspective of the creditor, mean you’re more likely to miss a payment.
We’ve put together five events that could cause your score to drop.
Have you cancelled an old account?
Sometimes credit card or store card issuers might assume a long held but never used account is dormant. They can cancel it without notifying you first, which can drop your score in a couple of ways:
- The cancelled account or card will alter the average age of your accounts, therefore making your credit history look as if it’s less stable than it was before the account was closed.
- It also increases what’s known as your ‘credit utilisation’. This is the amount of credit you use divided by how much credit is available to you in total. When your credit utilisation is increased, you become more of a repayment risk to creditors.
Has a credit report agency made a mistake?
It is possible for agencies that report credit to make errors. If a payment is accidentally marked as late, there is an admin error or even a case of mistaken identity, then your credit history can seem to be worse than it actually is.
It is worth mentioning that you are very much at the mercy of agencies reporting credit to the credit reference agencies. Agencies reporting come from a huge range including banks, finance companies, mortgage companies, mobile phone companies etc., etc. They usually provide information on a monthly basis to the credit reference agencies and these bodies simply update their records with the information provided. The number of records being updated is huge and mistakes can occur.
We think it’s worthwhile checking your credit report regularly, as mistakes do take a while to be sorted out. You want to be aware of any errors as soon as possible.
Have you paid off a loan?
It may seem counter-intuitive that paying off a loan would lower your credit score, but due to the fact that it limits the diversity of your credit, it does. If you can manage multiple accounts, such as a car loan and mortgage, along with credit cards, then it shows you are responsible with credit.
Without the diversity of the loans and fewer accounts, the risk of you not repaying is increased, according to credit bureaus. Don’t worry though, you don’t need to take out another loan just because of your credit score. Just make sure you manage your remaining accounts well and your score will rise again.
Have you forgotten about an old joint account?
If you used to have a joint account with an ex-partner, or you have an authorised user on an account who hasn’t been paying, then you could end up with payment penalties that will affect your credit score.
Have you been considering opening up a new line of credit?
Changing your mobile phone or Internet provider are basically a change in creditor. These new creditors will make a ‘hard’ inquiry when establishing your new account. These ‘hard’ inquiries therefore make credit agencies think your credit is more at risk.
There are many reasons for your credit score to drop, and they may not be immediately obvious to you. So, it’s important to maintain regular checks on your credit report. You could also set up notifications that tell you when your credit score has changed. This will give you a chance to correct it if you need to, so you won’t be caught out with a sudden drop in your score when you need it.
