Why is My Credit Score Going Down Even When I am Paying on Time?

Last Updated : Jan. 23, 2025, 5:21 p.m.

You may have paid your bills and loan EMIs on time, but your credit score will be going down. This is because there is more than one factor impacting the credit score. Let us now understand why your credit score is going down even when you are paying on time.

Factors Impacting your Credit Score

Even though you are paying on time, you may not be aligned with other factors that are impacting your credit score. Let us now read on to find out what they are.

Credit Utilization Ratio

The credit utilization ratio is one of the most important factors that impact your credit score. This ratio makes up for 30% of your credit score. It is the ratio of credit utilized by the total credit limit available. Experts recommend a CUR within 30% to 40% to maintain a good credit score. For example, if your total available credit limit is Rs. 75,000, then try not to spend more than Rs. 22500 in a month to keep your utilization within 30%. Spending more than this will lead to a dip in your credit score.

Applying for Multiple Credit in a Short Duration

Whenever you apply for new credit , the lender conducts an inquiry on your credit score and credit report. This is called a hard inquiry, and the credit bureaus cut a few points from your credit score for this inquiry. Too many hard inquiries will cause your credit score to drop. So, do not apply for additional credit unless it is really required. Analyse if you need further credit before applying. Also, if you want to get a new credit card or a loan, research first and find out the product that suits your financial requirement and eligibility the most. Then, apply for the same,

Not Being Aware of a Default Judgement

It may be possible that there is a default judgement against you which you may not be aware of. This will go down into your credit report. For example, if there was a lawsuit issued and not sent to you, then you would not know anything about it. If this is the scenario, you must take a decision as to whether you want to accept the judgement, settle it, or challenge it further. Information from public records such as lawsuits and settlement orders on your credit report will bring down your credit score.

Identity Theft or a Mixed Credit File

At times, somebody else’s credit activity will be reported erroneously as yours in the credit report. Someone else may be using your credit card or applying for fresh loans in your name. This is identity theft and can reduce your credit score significantly. So, if you find fraudulent credit applications, missed payments on unauthorized accounts, or collection agencies pursuing debts fraudulently opened in your name, then you must inform the credit card issuer or the lender. Another important reason why your credit score would have dipped is because of your credit files becoming mixed with somebody who has the same name as yours. If this is the problem, then you have to inform the credit bureau of the issue and get it rectified.

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How to Pay Off Debt to Improve Your Credit Score?

Here are a few tips on how to pay off your debt to improve your credit score.

• Pay off your high interest debts first: Paying off your high interest debts first can help you save money on interest payments. This will create a positive impact on your credit score.
• You can consider debt consolidation options: Debt consolidation is a financial strategy in which you unify multiple debts into a single loan. It enables people to handle their debt more easily and improves their financial stability.

How Long Does it Take for My Credit Score to Rebuild After Paying Your Debt?

Enhancing your credit score happens over a period of time with constant effort and financial discipline. While timely payments improve your credit score, it may take several months or years for your credit score to go up considerably.

How to Improve your Credit Score After Paying off your Debts?

After paying off your debts, it is important to take steps to rebuild your credit score. One key step is diversifying your credit portfolio . It can impact your credit score positively. A credit mix will include installment loans and revolving credit accounts. Instalment loans such as mortgages consist of fixed amounts and fixed payment due dates. Revolving credit, such as credit cards do not have specific due dates or amounts. Taking small credit builder loans or credit cards can reflect your ability to handle various types of credit. However, do not open multiple credit at the same time since it will impact your credit score negatively.

Why Will the Credit Score Drop After Paying My Debts?

There are various reasons why your credit score may drop after paying off your debt. They are as follows:

• Closing old credit card accounts: Age of credit history is very important in determining your credit score. The credit score reduces by decreasing the length of your credit history, since the credit length accounts for 15% of your credit score. Also, when you close your old credit card accounts, your total available credit limit will fall. So, assuming that your spends remain the same, your CUR will increase thus impacting your credit score. For instance, if your total limit is Rs. 50,000 and you were spending Rs. 5,000 every month. Now your CUR is 10%. Suppose, you close a credit card with limit 40,000 and your total available limit becomes 10,000, then the CUR becomes 50%. The CUR then goes above the recommended limit of 30% to 40% and impacts your credit score negatively.
  
• Erroneous information on your credit report: Incorrect information on your credit report also impacts your credit score negatively. Regularly checking your credit report and raising disputes with the credit bureaus is essential. Also if you detect frauds like new loans on your credit report which you have not taken, then it is essential to contact the credit bureaus instantly.