Remember about Drop in Credit Score
- Credit score is not just your debt and repayments. There are various other factors determining your credit score.
- Your credit report may have inaccuracies. Check and get them fixed, if any.
- Co-signing on a loan does affect your credit score.
- An unhealthy credit mix could be another reason for a drop in your credit score.
- A low credit score can be easily fixed with few simple measures. So don’t panic.
It can be a surprise to see your credit score fall despite paying all your bills on time. Don’t worry, you are not alone in this category. Many borrowers panic at the first instance of seeing a low credit score while they have been diligently paying all the bills on time to ensure that their credit score stays at the top.
You have to understand that there are a number of reasons for a drop in your credit score. It is not always a late payment or missed payment. Read on to find out the other factors affecting your credit score and how to fix them.
1. You used a lot more credit than usual:
Your credit utilization rate is taken into account when calculating your credit score. You should use credit in proportion to your income, preferably less. When you make a large purchase in a single month, the ratio between your income and credit is disrupted, which might affect your credit rating.
Fix: Always utilize the bare minimum of credit on your credit card, but don't leave it at zero. To maintain a healthy credit score, some form of rotational credit should be used. Just keep your credit utilization low to avoid affecting your credit score.
2. Applying for a new loan or credit card within a short period:
When you apply for a new loan or credit card, you will receive a hard inquiry. These searches have a negative influence on your credit score. When a person applies for more and more credit, it indicates that he is in desperate need of money. This is not good news for creditors.
Fix: If you don't want your credit score to suffer, limit your credit applications. At the very least, give yourself enough time before applying for new credit.
3. You canceled or closed one of your credit cards:
Your credit usage ratio is determined by adding up all of your credit cards and their credit limits. When you cancel or close one of your credit cards, it affects your credit utilization ratio, which might lead to a lower credit score.
Fix: It's critical to maintain a healthy rotational credit balance while avoiding overuse. Also keep in mind that closing your sole credit card or a very old credit card will have an impact on your credit score.
Additional Read: How can credit cards help me improve my credit score?
4. Not having a healthy credit mix:
Credit Mix, or the diversity of your lines of credit, is one of the most prevalent criteria used to calculate credit ratings. It's also one of the least well-known among customers. Multiple credit accounts, such as a home loan, personal loan, and credit card, show lenders that you can manage multiple types of debt at the same time. It also helps them have a better grasp of your financial situation and debt repayment capacity.
Fix: While having a much less diverse credit portfolio does not automatically lower your credit scores, the more credit kinds you have, the better (as long as you pay on time). Credit mix accounts for 10% of your credit score and can help you achieve a good score.
5. Your credit limit on your credit card has been reduced:
When calculating your credit use percentage, your credit card credit limit is taken into account. As a result, if one of your credit cards loses its credit limit, your credit utilization ratio will deteriorate, and your credit rating will suffer as a result. Even cancelling one of your credit cards has a significant impact on your credit score because it may result in a reduction in credit availability, lowering your credit score.
Fix: Contact your credit card company to check if your credit limit can be restored to its previous level. You can demonstrate your need for a higher credit limit by presenting your most recent income documents.
6. You cosigned on a loan:
A solid credit score can be quickly harmed by co-signing on a loan for a family member or acquaintance. For starters, the financial obligation will immediately appear on your credit record, and a bigger debt load may have an impact on your credit score. Second, if a friend or family member fails to make a payment, the missing installments will be recorded on your credit report. It will also reflect on your credit report if the account is eventually turned over to collections.
Fix: Even if you're obliged to co-sign on a loan for a family member or friend, make sure they're properly servicing the loan and aren't missing or defaulting on payments.
7. Not monitoring the spending habits of the add-on credit cardholder:
You may have a few add-on cards for your siblings or parents as the family's provider. Because you are the principal cardholder, if they are careless with their card usage, it will have an impact on your credit score.
Fix: Check your emails and SMSs regularly on what is being spent on the add-on card. If necessary, set a daily spending limit on the add-on card to control the spending.
Also Read: Credit Restoration Strategies - A Guide To Repairing Your Credit
In Conclusion
Even if you pay your EMIs, bills, and other payments on time, seeing a drop in your credit score might be upsetting. Don't be alarmed if you've recently observed a drop in your credit score. Any of the aforementioned factors can cause a reduction in your credit score. Recognize that it might be corrected, and take the necessary efforts to revive your credit score.