Have you noticed a drop in your credit score, and don't know why? Understanding the factors that can cause your credit score to drop is central for maintaining your financial well-being. Let’s look at the common reasons behind a decrease in credit scores and provide some tips on how to effectively address them.

Exploring the Causes of a Credit Score Decrease

Late or Missed Payments

One of the most significant factors affecting your credit score is your payment history. 

• Completely missing a payment or making a late payment can result in a notable drop in your credit score. Sometimes, the impact is more severe for those with higher, or ‘healthier’ credit scores because it shows unusual behaviour and could mean that you are starting to get into financial difficulty.

To avoid this, it's crucial to prioritise making all your payments on time, making sure they are received by the stated due date. Being just a couple of days late could still impact your credit score.

However, in circumstances where you've missed a payment, addressing the issue immediately by settling the amount owed and contacting your creditor (lender), can help. Some creditors may be willing to forgive a late payment, especially if you have a history of timely payments.

High Credit Utilisation

Credit utilisation is a major component of your credit score. This is the ratio of your credit card balance to your credit limit (how many % of your available credit limit that you are using). 

• A sudden increase in your credit card balance, especially if your utilisation rate exceeds 25%, can lead to a reduction in your score. 

To manage this, try to keep your balances low and maintain a low credit utilisation rate. In some cases, you may consider requesting an increase in your credit limit, but it’s important to ensure this doesn't involve a hard credit check, as that could negatively impact your credit score further.

New Credit Accounts and Hard Inquiries

Applying for new credit can temporarily lower your score if hard credit checks are made by the lenders. However, once the loan starts to be repaid, providing all the payments are made on time, your credit score usually goes up.

Opening new accounts can decrease the average age of your credit accounts, which also impacts your score (a higher average age of credit accounts indicates that you have a longer credit history and more experience managing money). 

When considering opening a new credit account, it is essential to weigh up the pros and cons, and think about the long term impact of taking it out on your credit history and score. 

Use prequalification offers to see how likely it is that you will be offered a loan from a lender. Prequalification offers generally don't impact your credit score as they usually use soft credit checks - but make sure to check first!

Another top tip is to refrain from applying for credit too often in a short amount of time. If you skip the prequalification offers and go straight into lenders performing hard credit checks, this is going to show up on your credit history. Too many of these in a short amount of time will set off alarm bells to potential lenders. 

Changes in Account Status

Closing credit cards, particularly older ones, can have a double impact: it can shorten your credit history and increase your credit utilisation ratio, both of which can lead to a decrease in your score. 

Before closing any accounts, consider the long-term impact it may have on your credit history. If you have a card with high fees that you no longer use, it might make sense to close it. However, as mentioned in the point above, it’s often beneficial to keep older accounts open to preserve the length of your credit history, to show lenders you have more experience with managing money. 

Inaccuracies in Credit Reports

Errors in your credit report, such as incorrect late payment records or accounts that you don’t recognise, can lead to an unjustified drop in your score. It’s crucial to regularly review your credit reports for any inaccuracies. If you find errors, contact your lenders and the three main credit reference agencies (Equifax, Experian, and TransUnion) as soon as possible. This may lead to an investigation to correct any data management errors that have affected your credit score. 

Unexpected and significant changes in your credit score can be a sign of identity theft. When reviewing your credit reports, watch for red flags like unfamiliar accounts or addresses. Addressing identity theft involves reporting the issue immediately, considering placing a fraud alert or a credit freeze on your reports, and regularly monitoring your credit for any further signs of fraudulent activity.

Understanding the reasons behind a credit score decrease is the first step in taking control of your financial health. By identifying the cause and taking appropriate action, from addressing late payments to disputing inaccuracies, you can work towards stabilising and potentially improving your credit score. Remember, regular monitoring of your credit report is key to staying on top of your credit health.

Interested in Boosting Your Credit Score?

Starting with an improvement in your credit score is an excellent first step. We have nine nifty tips that we have collected, that can help you get started at boosting your credit score.

Even better news? Ozoomi Boost is a simple and secure way to boost your credit score and there’s no credit search needed! 

1. Here's a quick summary: You decide on a manageable monthly payment. Ozoomi then grants you an interest free loan equivalent to twelve times this monthly amount, which is securely held in a savings account. 
2. By making timely payments each month, you demonstrate financial reliability. We report your punctual payments to credit reference agencies, positively influencing your credit score (a green flag for future lenders).
3. When the year ends, not only is your loan fully repaid, but you also have a great deposit saved up for a new car, along with an enhanced credit score to secure more favourable terms on finance.