Credit score is an important factor to consider, whether you want a loan, credit card, or even in the case of finding car insurance. There are various ways in which your credit score can be increased which we have discussed in the previous article. However, what are the exact reasons responsible for your credit score to fall down. You might not even be aware, but the unimaginable of the things could cause your credit score to dropdown. Credit Bazaar examines and investigates the exact reasons for your low credit score so that ways could be found out for raising it. Following are the reasons that could lead your credit score to fall down:
- Payment history: Your payment history could be one of the factors responsible for your low credit score. The score is decreased if you are paying only the minimum amount in case of a credit card or if there is delay in payment in a loan situation. A delay in making payments or default on your EMIs leads to a bad credit situation and a fall in the credit score. If a default is done once, there will be an impact on your score, but if you are a regular defaulter, score will be adversely affected for sure. Also, if your credit history is not diversified, and only revolving accounts are depicted on your credit report, your score may go through a downward spiral.
- Unemployment: Almost everybody has faced patches of unemployment in their lives. However, there are various employment benefits that help us to sail through such tough times. The important thing to remember here is that because of this your credit score could be negatively affected. So, it is better that these benefits are only received by you for a very short period of time. The credit bureaus do recognize the reduction in income, but they fail to notice that you are on unemployment. This might change the ability of the person to pay timely the dues, and this is exactly what can damage your credit score.
- Management of credit mix: The balance between unsecured loans and secured loans should be maintained. Your credit score can be impacted if your unsecured and secured loans are balanced in an uneven manner. Unsecured loans are based on your creditworthiness while secured loans are secured by collateral. A financial profile that only has unsecured loan impacts your credit score negatively showing that you have high debts and that you are not in a position to provide any collateral. Therefore, it is important that your loan profile has a healthy combination of both unsecured and secured loans representing a clear message about your financial independence and assets. Since the information is provided by financial institutions and banks, the credit records cannot be changed once the information is fed. The consumer profile and the current trends in credit data are mentioned and updated from time to time. In a case where you have no or inadequate credit history, lenders are reluctant to provide you loans.
- Too many credit requests: A sudden increase in new credit requests sends a wrong message to credit agencies that can drop your score. It will negatively impact your credit score if you have applied for multiple loans at one time or for various credit card requisitions at the same time. Such a kind of financial behaviour is a serious concern from the lenders’ point of view. It is clear that your debt burden will increase substantially when you make multiple applications for credit cards or loans. A high amount of debt burden refers to a weakened capacity to repay dues or loans and the possibility of it becoming weaker in future. It can be a constant debt burden to you if you keep spending money on a regular basis by exhausting your credit limit. When a loan is accepted during this time, your repayment capacity would be affected negatively. You could be placed in a lower bracket in your credit report for warning lenders of your high credit utilization in such circumstances.
- Expensive purchase: Your credit utilization ratio is one of the important factors that can positively or negatively affect your credit score. Well, surprisingly, if you make a big-time purchase on your credit card this month, your credit score could drop even if the balance is paid in full even prior to your due date. This is usually because the credit card balance is reported by the credit card issuers usually on the last day of the billing cycle. The balance that appears on your credit report is generally the balance that is on your credit card statement. However, this can be corrected easily just by avoiding to make any other credit card purchase., paying down the balance immediately, and with lots of patience. The lost credit score points can be recovered easily through these simple steps.
- Administrative error: There may be an administrative error on your credit report occasionally which could result in wrong information being recorded. This could be a sign of a fraudulent activity too. These errors could result in a lower credit score with no fault from your side, sending a signal that you have a bad credit to your future lenders. Basically, your credit report shows a detailed record of you all your past as well as current credit accounts. That is why, if you spot any discrepancies in your credit report, you must get them rectified instantly. Also, these errors should be rectified by solely the lenders as the reports are not corrected if the changes are not reported by the lenders. Furthermore, checking the credit report also assists in recognizing if you are a prey of identity theft. At the same time, make sure that small typos or errors must not impact your credit score and that is the prime reason you should monitor it frequently and also work along with professionals who can guide you in the correct manner.
- Credit limit reached frequently: It is a sign of a burden of constant high repayment if you reach the credit limit on your credit card frequently. It could also negatively affect your repayment capability when your loan application is being considered to be accepted or not. Thus, the credit score could be shown in a lower bracket, informing about your high credit utilization to the lenders.
- Unpaid account sent to collection: It is crucial to pay all your accounts on time, including loans and credit cards for resulting in credit score improvement. If you are held behind in making payments for your non-credit account such as a monthly phone bill, the information about your defaulted balance could be sent to a collection agency and then shown on your credit report. It will almost lead to a drop in credit score when a collection is represented on your credit report.
- Closed/cancelled a credit card: It is believed that credit cards are the best tool for building credit history. However, they must be managed with the utmost care. If the card has a balance, it could really hurt your credit score by closing the credit card. Even if the credit card issuers cancel your credit card from their end, it will impact your credit because the account got closed in the first place. This is because you end up losing a long credit history that is associated with your closed old accounts. Thus, it is beneficial to keep the card open for a significant number of years, basically as long as possible, if practicable. If you really want to, you can consider closing a relatively new card. Also, you can move the balance to the lower interest rate card so that you can give it off faster, though avoid clothing the other card. Just put in a drawer and stop using it frequently, just let it remain open for maintaining a lower credit utilization ratio and a higher credit limit. Just remember that the creditor may close off the account if your credit card goes unused for an extended period of time. Thus, for an occasional purchase or two, you can take those cards out and pay off the balance before the bill arrives to avoid accrued interest.
- Fraud or identity theft: Well, if everything is going well with all your financial credit and you are very sincere in making all your payments on or before time, then a major haywire caused to your credit score could be because you might be a victim of identity theft. It is very important to keep a keen eye on your credit history and your accounts for making sure that all the activities that are listed are yours. If you find any suspicious activity, report it instantly to your banks, credit bureaus and the lenders. It might be preferable to work with a professional who can step-by-step guide you for resolving identity theft issues and work hands-on with you in order to recover and fix your credit.
- Bankruptcy falling off the credit report: You are likely to move towards a new credit scorecard when your bankruptcy falls off your credit report after seven years. Again, your credit score could drop because at this time your credit performance is being compared to people who have not been filed for bankruptcy at all in the first place.
- Last collection dropping off the credit report: You might wonder that if the negative information is dropping off your credit report, why is your credit score still dropping. This might be because people are usually placed in different buckets called scorecards, and when your credit profile is compared to other people, you may fall to the bottom of a different scorecard. This could happen even if you are at the top in a different scorecard with respect to the collection on your credit report. Such a type of drop in your credit score is actually out of your control, however, as long as you keep your debt low and keep paying bills on time, your credit score will fortunately improve.
- Credit history length: Credit history exactly refers to the number of years that have passed that your first credit account was opened. The lenders are very happy to see a long credit history as they are able to judge easily. They can make a sound decision by looking at your long-term credit behaviour and decide whether or not to offer you credit. Therefore, it is recommended to focus on building a credit history at an earlier stage in your life as then you will have a good record of credit transactions by the time you apply for a car or home loan.
- Delay in payments: When the loan and credit card payments are late by more than 30 days, it is reported to the credit bureaus, thereby reflecting your credit score. Your credit score is most likely to drop down if a late payment hits your credit report even once. Make sure that you make all your credit card payments on time to stop your credit score from decreasing.
- Negative item in the history: Even if everything is perfect with your financial management at present, a stagnant or low credit score could be the result of a major negative aspect in your credit history. Bankruptcies, foreclosures, and defaults remain on your records for years, driving down your credit score. These items fall off the list over the years, meanwhile, you can manage money positively and make timely payments, being left with a strong uphold on your financial situation, creating a higher score quickly. Moreover, you can receive legal and financial advice for repairing your credit.
Therefore, a lot of aspects are involved in impacting your credit score negatively, including credit utilization, errors, age of accounts, payment history and so on. Credit Bazaar helps you to understand and analyse the exact reasons for your low credit score and also provides various methods, tips and techniques in which your score can be increased.
For any queries regarding Credit Score improvement or Loan contact Credit Bazaar CR Arcade 2nd Floor, Opposite Delta Garden, Next to Shree Mahalaxmi Restaurant, Mira Road East, Thane : 401107