A surprising amount of our everyday life is influenced by our credit scores and credit reports.
Those of us who monitor our credit score can’t help but smile when it increases, as it means we must be doing something right.
Unfortunately, the opposite is also true.
But why would your credit score drop?
First let’s set the scene. Here we’re talking about credit score dropping a few points, 5-20 points. Nothing major.
A more serious drop needs more serious investigation. The principles on this page hold true, but more drastic action may be needed.
Credit scores and you
Let’s clear something else up too. Credit scores are important to how we live our lives. They can influence where we live, what we buy, how we manage money, what phone contract we can get and so much more.
But it’s just a number.
We should be aware of our credit scores and keep an eye on our credit reports.
We should not stress the numbers or worry when our credit scores rise and fall. It’s just a number.
As long as the overall picture is relatively stable and shows you’re good with managing debt, that’s all you really need to worry about unless you’re planning to borrow a lot of money.
However, back to the point at hand. Why has your credit score dropped?
Reasons why your credit score dropped
There are a multitude of reasons why credit scores fluctuate.
Some will be down to changes in how you’re managing money. For example, you just got a new credit card or paid off a loan.
Those things will cause minor changes in your credit score and are absolutely nothing to worry about.
Here are a few reasons why your credit score may have dropped:
You just applied for credit
Your credit score may drop a little because you recently applied for credit, a new credit card or store card for example.
Credit applications involve a hard inquiry on your report, which alerts other potential lenders you’re shopping around for credit.
For some reason, this can have a temporary negative effect on your score.
You paid off a debt
Believe it or not, paying off your mortgage, loan or credit card balance can lower your credit score.
Your credit score is made up of lots of factors including age of your accounts, spread of account types and other things.
Change any of those, even for the better and it can negatively impact your credit score. Not by much and not necessarily for long, but you’ll likely see a dip.
You’re borrowing more
Borrowing more can also cause your score to dip. You’re using up more of your available credit (credit utilisation), which means you have less ability to borrow.
A reduction in your credit score shows other lenders you’re worth a longer look if you apply for more credit.
You just moved house so your credit score dropped
How long you have been at your address can also impact your credit score. Lenders love stability and the longer you live somewhere, the happier they are.
Moving often can negatively impact your credit score. As can having just moved into a house or having just added yourself to a new electoral roll at a new address.
Errors on your credit report
Mistakes happen and credit bureaus are not immune to them. While they are rare, each bureau handles millions of changes per day so mistakes are bound to happen.
That’s why I and many others recommend checking your entire credit report at least once every few months and definitely before applying for new credit.
Experian, Equifax and TransUnion all have forms you can fill in to alert them to a mistake.
Identity theft
Typically, being the target of identity theft would involve a sharp drop in your credit score as there is likely a lot of new credit taken out in your name.
However, some identity thieves are more subtle and will take a little, more often in the hope you won’t notice.
Late or missed payments
If you miss a credit card, loan or mortgage payment, that will usually have a negative impact on your credit score.
If it was a mistake and you pay immediately, the lender may give you the benefit of the doubt and not report it as a missed payment.
Some will though.
More serious debt issues
Bankruptcies, CCJs and voluntary agreements can all impact your credit score.
Those will likely involve more serious drops in your score and you’ll know all about them as it’s a long process, but they can explain what’s going on.
Your credit score and you
As you can see, there’s a lot that goes into calculating a credit score. There’s also a lot of fluctuation that happens within a score on a weekly basis.
Be mindful of what’s going on and what changes, but don’t worry about it.
They are just numbers and they will fluctuate regularly over time, both upwards and downwards.
It’s only worth being concerned if it drops a lot or you’re planning to get a new loan or mortgage in the near future.
Otherwise, there are far more important things to spend your time thinking about than credit scores!
