Picture this: You check your credit score once every six months. Instead, of a steady climb, you’re troubled to see that your score has plummeted. What do you make of it?
If your credit score has taken a dip for seemingly no reason at all. Don’t panic.
This is a common experience and it doesn’t mean that you’ve done something wrong. Several factors contribute to the drop in your credit score. Let’s take a look at the top reasons why your score may have dropped.
#1: Your Credit Utilisation Ratio may have gone up
This ratio refers to how much of your available credit you have used at any time and it accounts for 30% of your credit score. So, if you have a credit limit of 50,000 INR and generate bills up to 45,000 INR every month, your credit utilisation ratio is pretty high.
It doesn’t matter if you pay your credit card bills on time. As your ratio is high, your credit score may have fallen down.
The Fix: Try to increase your available credit limit to keep the ratio down. Alternatively, you can apply for additional credit cards to keep the overall credit ratios down.
#2: You may have missed one or more payments
Making a late payment on your credit card and other loans is a big No. Say, you had gone on a holiday or were tied up in other emergencies and you failed to make a credit payment. When you realise your mistake, the due date is long past. You then roll the payment along with the next one. This causes your credit score to fall.
The Fix: Set up alerts on your phone or auto debit options for your payments, so that you don’t miss out on any bills.
#3: A Negative Remark was added to your Credit Report
If you see a major drop in your credit scores, then it could be because of a derogatory remark. The reasons for this may be:
● Civil Judgements
● Tax Liens
● And, many more
The Fix: If you notice any derogatory remark on your credit report, make sure to take corrective action immediately to fix it.
#4: You gave up an Old Credit Card
Very often, people make this mistake. They assume that by surrendering unused credit cards, they can boost their credit scores. The reality is the opposite of that. Hard to believe? Let us explain.
The age of your credit history plays a crucial role in determining your credit scores. By closing the oldest card, you’re lowering the age of your credit accounts, which in turn causes your scores to fall.
The Fix: Instead of closing an old credit card, you can ask your credit card provider to upgrade the features on it.
#5: You Finished Payments for a Loan
While it’s not absolutely necessary, having different types of credits (credit cards, loans) demonstrate your ability to handle credit efficiently. This works in your favor, thereby boosting your scores.
On the other hand, when you close the only loan that you have availed, it makes you less credit diverse, which impacts your score. Similarly, you also run the risk of lowering your score, if you take several loans at the same time.
The Fix: Before you close any loans or credit cards, take a look at your credit report to see if it has a fair distribution of credits.
As you can see, a surprising number of factors cause your credit scores to fall. To ensure that your scores are consistent, make sure to be disciplined in all your payments, keep your credit utilisation rate low and check your credit report for any errors from time to time.
If you run into the bad luck of your loan getting rejected due to the recent dip in your credit scores, then don’t fret. You can approach digital lenders like Indifi who help small businesses with credit, based on their business transactions to meet business fund requirements effectively.