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What can cause your credit score to decline?

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Understanding what causes your credit score to decline is incredibly important for your financial well-being. If you’ve noticed a recent dip in your score, you may be concerned and confused about what’s happened.

Here, we explore several reasons why your credit score may drop to help you take proactive steps towards healthy credit going forward.

Payment history

How you manage your monthly payments can impact your credit score. If you’ve recently missed payments or made them late, it can lower your score and sit on your credit report for up to six years.

The reason missed or late payments affect your score is because it affects how trustworthy you appear to lenders. Experian states that “overdue payments can suggest you’re struggling to manage your finances. As a result, you might not meet some companies' lending criteria.”

To avoid this, set up regular payments to be taken through direct debit and track your account through the month to make sure there’s enough in there to cover the costs.

Credit utilisation rate

Your credit utilisation rate is the amount of credit you’re using compared to how much is available to you. This is usually shown as a percentage.

For example, if you have a credit card with a limit of £3000 and you’ve spent £850, your credit utilisation rate is 28.33%.

If you’re using a large proportion of your available credit, it can affect your credit score. It’s wise to try and keep your credit utilisation rate as low as possible, but using some credit is better than none at all.

Forbes says that “in an ideal world, it’s best to keep your credit utilisation rate under 30%. If this isn’t possible, aim for under 50%.” There are several ways to lower your credit utilisation rate, such as paying off credit card debt and requesting an increase in your credit limit.

Credit applications

Applying for several lines of credit in a short period can cause your credit score to decline, even if you’re accepted.

Hard searches are carried out during credit applications that cause a temporary drop in your score and show up on your credit report. If multiple searches are done in quick succession, they can add up and cause a significant decline.

Try to minimise the number of hard searches by ensuring you’re eligible and are likely to be accepted for credit before applying. This reduces the risk of being rejected and having to apply again elsewhere.

There are many ways to boost your credit score if you’ve noticed a dip. Make sure you’re registered to vote on the electoral roll, as this can impact your score. Only borrow money if you can afford the repayments, keep credit balances as low as possible and set up direct debits to make sure you pay things on time.

By taking steps to improve your score, you can ensure you’re set up for a more stable financial future.

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