Rajat Sharma is a marketing professional based out of Calcutta and has always been responsible towards his finances. He was one of those who always kept a tab on his finances and credit scores. He always checked his credit scores at least once in 6 months. This time around when he checked his credit score, he was surprised to see his score go down from 720 to 630, while there was no event that he could remember that would attribute to low credit score. He was perturbed and checked his credit report.
He found that this was due to a mismatch in PAN numbers and there were repeated hard inquiries on his PAN in a short duration causing his credit score to go down.
This was one of the reasons, let us see what other reasons could lead to a drop-in credit score.
Additional Reading: Why is my credit score low?
Higher Credit Utilization ratio: Credit Utilization ratio is one of the main components of a credit score. Your earlier score would have been calculated as per your existing credit utilization ratio. However, if there has been a consistent increase in your credit utilization ratio your credit score would have dropped down. Higher utilization is an indicator of poor credit habits.
Missed a repayment: Credit scores are all about how efficiently you manage your existing credit. Repayments of loans are the cornerstones of good credit behavior and missing a couple of them will have a negative bearing on your credit score. It is quite common that we end up missing a due date. In such cases, it is good to inform your lender immediately that you have missed the due date and immediately pay up the missed EMI with penalties if any. This would do some damage control than totally missing the repayment.
Closed your existing credit relationships: The duration of the credit relationship with a lender also is one of the factors deciding your credit score. It gives a better view of how a person has been managing credit over an extended period of time. If you suddenly close one of the old credit card accounts because you got a better offer, the fact may not bode well for your credit score.
Availed new loans: Availing new loans or frequent loans over a small period of time will show an individual as a credit hungry person. Consequently, there is bound to be a drop-in credit score.
Additional Reading: 6 Reasons Why Your Credit Score is not Improving!
Errors in the credit score: There are some factors that affect your credit score which is beyond your control, like errors in the credit score. These errors may be due to wrong reporting from your lender's end. All lenders report information related to repayment, opening, and closure of credit account to the credit bureaus. A small error like using the term "Settled" instead of " Closed" brings a drop in your credit score. Missing a repayment can also have a similar effect.
There might also have been cases where your PAN was used for some other loan applications resulting in hard inquiries. This is what happened to the individual we talked about earlier. The PAN mismatches might have been intentional or due to oversight.
The only way anyone can prevent a drop-in credit score is by regularly checking your credit scores. So there is always enough time to take corrective action if there is a drop in credit score so that you can be creditworthy at all times.