Its never a good feeling to see a dip in your credit score even when you are paying your EMI’s, bills or any other payments on time. If you have noticed recently a drop in your credit score, don’t be alarmed. Your credit score can drop because of various factors and any one – or a combination of them. Even getting approval for new credit can negatively affect your credit score.
Since the credit score is not a static number and it keeps changing from time to time, hence, this is a fairly common experience and it doesn’t mean that you did something wrong. If you have experienced it, there are many potential explanations. But you be able to quickly identify the reasons can help you in taking corrective measures against it.
We have curtailed down a list of reasons that may help you understand why your credit score drops and you can address each of them.
Credit Utilization Ratio
Credit utilization rate is one of the most important factors that cause a dip in your credit score. You take a credit card everyone will tell you how to spend the available balance and repaying the due payment on time. But nobody tells you how much you should spend, what is the ratio you should maintain. Credit Utilization ratio accounts for 30% of your credit score. It only considers your revolving credit that is your credit card.
It has been suggested that one should only use 30% of his credit card available balance, that is the best practice one can have to maintain a steady credit score.
For instance, if your credit card limit is ₹50,000. so, in that case, you should not spend more than 30% of this limit in a month, that would be ₹15,000.
So if you want to raise your credit score you should keep the balance under 25% only. If you spend more than usual from last month, then will also drop you’re your score. As your usage limit will go up automatically. This drop-in credit score points may vary from profile to profile.
Reduction in limit available in one of your credit card
Another reason for the credit score drop is if your credit card limit has been reduced by your credit card issuer.
For instance, If your limit is ₹20000 and you are using up to ₹5000 every month, but in case if your limit is reduced to ₹15000 then your utilization ratio will go up automatically. Earlier it was 25% now it will be 30%, so that may lead to 40-50 points drop in your credit score.
Regardless of whether your credit card limit is reducing or your balance is increasing, you must keep an eye on your credit card utilization ration to maintain it.
Incorrect information in your credit report
This is another major reason for the decline in your credit score. Regularly checking your credit score is one of the best ways to make ensure that every detail is accurate. Sometimes it happens that your lender accidentally reported inaccurate information to credit agencies or you might have become the victim of identity fraud. If you encounter such a scenario, you should dispute the information with all the three credit agencies (major three credit agencies Transunion, Equifax and Experian). Also, contact your lender as well if you receive any notices or communication.
You can identify this by checking your enquiry section, if you see the search for new accounts which you didn’t apply for, then you shouldn’t waste a minute and contact the agencies at the earliest.
Opening new accounts or multiple enquiries
You will also experience a drop in credit score if you have made multiple enquiries while applying for a new product, offer have taken a new credit card. When you allow any financial institution or lender to pull out CIBIL report to check whether you are eligible for the applied or not then it will affect your credit score. Hence, rather than making multiple enquiries with multiple lenders, do your market research on the products, and then apply with the lender who you found will give you the approval. Enquiries make 10% of your credit score. So we suggest you to avoid making multiple enquiries.
Also opening multiple new lines of credits or availing multiple financial products at one time also causes a drop in your credit score. Hence you shouldn’t do that.
Closing of old accounts
It’s not wise to close your oldest accounts, you should think twice before doing so, as it will have an impact on your credit score. Closing a credit card will increase in your overall utilization ratio and may also reduce the length of your credit history – both will impact your credit score.
The length of your credit history accounts for 15% of your credit score, a longer history may help you to maintain a good credit score. But if your credit closed on good terms (means by paying all the payments on time), the account will be shown on your credit report for 10 years and will have minimal impact on your credit score.
Unless the credit card you are having, has a high annual fee and tempts you to spend more than you should, it won’t hurt keep the account open to maintain a good credit history and score.
Credit mix is the last and most important component of your credit score. It accounts for 30% of your credit score. It is determined by the types of credit line you are having and how many there are.
It’s a mix of instalment credit and revolving credit. Instalment credit have a fixed amount and fixed due date for payment. Like mortgages, loans, etc. Revolving credit doesn’t have a specific due date or amount to make the payment, credit cards come under the revolving credit. It is wise to make the minimum payment on time and charge only how much you can afford per month not more than that.
Maintaining a credit mix shows that you are able to handle various types of loans at one time without making any default. Also, it will help you in keeping your credit score healthy.
If you have only one credit card in your account and making payments on time, that will also improve your credit score but will take time. Hence it is advised to take a small amount of personal loan, that will ensure that you can handle different types of credit.