What factors affect your credit score?
So, your credit score has dropped. This is certainly unfortunate news, especially if you weren’t expecting it or if you’ve been working hard to build up or maintain your score.
So, why did this happen? Is there anything you did or didn’t do that caused this?
Let’s have a look.
What factors affect your credit score?
It’s important to remind yourself occasionally what data is used and assessed to determine your credit score.
Knowing this can help you to find out why your credit score has changed quickly and without having to dig too deeply:
Account balances: your credit score is affected by how much money you owe on loans, credit cards, and other types of borrowing.
Payment history will be evaluated included within your credit score to see if you’ve always been capable of making your payments and if you pay more than you should.
Credit utilisation refers to how much of your available credit is being used on accounts with credit limits. This will be evaluated and factored into your credit score.
Details from the electoral register and other public databases, like the one that keeps records of CCJs and bankruptcies, all contribute to your credit score.
Your credit score will incorporate your address history, such as how long you’ve lived there and whether all of your accounts are linked to it.
“Hard” credit checks – the number of “hard” credit checks on your credit report (that are done when you formally apply for a loan, among many other things) is also taken into account.
Next, you may learn a little more about the situations that can reduce your credit score, as well as which parts of your credit score, are influenced by each one.
What impact does a late payment have on your credit score?
Skipping a payment is among the most obvious reasons your credit rating has dropped, as it shows you are unable to meet your responsibilities.
Each month, your account providers will update the credit reference agencies on the status of your account, including whether you’re current on your payments or not.
If you’ve skipped or made late payments, it will show up on your credit report and have an impact on your credit score.
If you’ve missed several payments, your credit report may show defaults, and some lenders may file a CCJ against you as a last-ditch effort to recover what you owe them.
What does this mean?
The impact of a missed payment on your credit score is based on two factors. First, determine how recently the payment was missed and whether it was a one-time occurrence or a hint of larger financial troubles.
A single missed payment a few years ago can be put up to a blip in your credit history and will have little impact on your credit score. However, if you consistently skip payments and now have one or more payments past due, accounts in default, or CCJs recorded against you, you may be in financial distress.
In the most severe cases, the damage to your credit score can be so severe that you won’t be able to borrow for several years.
What can be done about it?
If you usually make your payments on time but neglected this month, you should make the payment as soon as possible to catch up.
Then, to avoid forgetting, set up a direct debit or standing order from your bank account to make the payment every month.
If you’re having trouble getting back on track for any reason, it’s critical that you contact your account provider.
We recognize that this isn’t a pleasant topic to discuss, but you’ll be amazed at how kind and accommodating many businesses can be. They may be able to assist you in finding a more affordable payment option and taking steps to prevent the situation from worsening, including freezing interest and charges, avoiding a default on your account, and deferring legal action. Lastly, consider checking Shoplogix OEE Software a user-friendly visual dashboard alongside innovative features and opportunities for continuous growth.
Will making a large purchase affect my credit score?
Depending on the size of the purchase and how you pay for it, large purchases can have a variety of effects on your credit score.
To avoid borrowing money to buy stuff, it’s always advisable to save up and pay with cash if you can. However, this isn’t always attainable, and using credit may be the best option for you.
When you borrow money to make a purchase, the amount of additional debt you take on is the first factor that affects your credit score.
The amount you owe is documented on your credit report, and lenders may consider it if you want to borrow more money. This could make you less likely to get approved. If you’re taking out a new loan or credit card to pay this purchase, a “hard” search on your credit report may have an influence.
Finally, if you’re making this transaction with a credit card, your credit utilization will have an impact on your credit score. Credit utilisation refers to the percentage of available credit that you are utilizing, and making a large purchase will surely increase it.
What does this mean?
The extent to which your credit score suffers as a result of this purchase is determined by the rest of your circumstances.
Making a large purchase using a loan or credit card may not improve your credit score significantly on its own. However, the impact could be substantially bigger when combined with your current financial condition.
To begin, making this purchase will increase the total amount you owe. If it’s the only money you’ll owe, it’ll have a smaller impact than if you’re adding to an already high level of debt.
The more debt you take on, the more you’re stretching your budget, and the lower your credit score will be.
Similarly, if this is your first credit application in a long time, the impact of the “hard” search that is recorded on your credit report will be significantly lower than if this is the most recent in a series of applications.
Lenders often consider having three or more “hard” searches done on you in a year to be a red signal, as it appears that you’re desperate for cash and maybe taking on more debt than you can handle.
Finally, if you’re using a credit card, consider how this transaction may affect your credit utilization.
Keep in mind that this is the percentage of your total credit limit that you’re utilizing. Of course, lenders prefer to see you use your credit.
However, they consider high utilisation – when you use more than 75% of your available credit – to be a sign that you’re reliant on credit to get by. Lenders consider credit utilization of less than 30% to be prudent use and a sign that you’re normally living within your means. For example, if you have a credit limit of £2000 and a balance of £1000 on your credit card, your credit utilisation is 50%.
What can be done about it?
Buying something large, whether with cash, a loan, or a credit card, is usually a well-considered decision.
It’s likely that the impact on your credit score has entered your thoughts – after all, that’s why you’re reading this – and you’ve decided that it’s a means to an end.
You can bounce back if you handle your borrowing correctly, and your credit score may improve from where it was before you borrowed.
Make sure you pay your bills on time every month, pay off as much as you can each month to lower your debt and credit utilization, and avoid applying for new credit if you can to keep the number of “hard” searches on your credit report to a minimum.
Has my credit score dropped because I merely applied for credit and didn’t acquire the loan?
Applying for credit may appear innocuous, but it has a significant impact on your credit score. Whether you acquire credit from them or not, when you submit an official application for a loan, credit card, or other types of credit, the provider will record a “hard” search on your credit report.
“Hard” searches are analyzed and factored towards your credit score, which can lower it.
What does this mean?
The impact of a “hard” search on your credit report on your credit score varies depending on whether it’s the first one you’ve had in a long time or the most recent in a series of searches.
Having a single hard search on your credit report when you applied for credit that you truly required is vastly different from having five or six searches in the last few months by various suppliers.
In most cases, conducting one “hard” search on your credit report in a 12-month period is considered quite standard behavior and will not negatively impact your credit score.
Expect your credit score to drop even more if you have more than one. The larger the dent, the more searches you conduct. A lot of “hard” searches on your credit report within a year of each other – and by a lot, we mean three or more – could indicate that you’re borrowing more than you can afford. Lenders want to know that you can afford to pay back whatever you borrow, so any indication that you might not be able to is a red signal for them, and your credit score will suffer as a result.
What can be done about it?
We don’t want to scare you away from applying for the credit you need or desire because you’re worried about the damage a “hard” search on your credit report could do to your credit score.
After all, if you want to fulfill your ambitions, you may need to borrow money. How many people do you know who have purchased a home without taking out a loan?
“Planned for” is the essential phrase here. Applying for a new credit card with a lower interest rate than your current card is a wise decision that could save you money.
Applying for six different credit cards you don’t need just to see which ones accept you… not so much.
Keeping your credit applications to a minimum will reduce the impact of “hard” searches on your credit score. One or fewer times a year is ideal, but we understand that you won’t always be able to avoid requiring credit more frequently.
If you’ve been applying for credit solely to see if you qualify, there’s a better method to find out without jeopardizing your credit score.
Many providers now feature eligibility checkers, which allow you to see how likely you are to be approved without having to fill out a full, official application. With some programs, such as ours, you can even check your eligibility and evaluate different alternatives all at once.
What effect does relocating have on your credit score?
Moving is usually a positive experience. Starting your first taste of independence, branching out from a shared house to a place of your own, getting on the property ladder, or climbing up a rung or two, frequently requires moving into new quarters. All of these are definitely significant aspects of adulthood. Moving residence, on the other hand, is stressful, and the temporary disruption can affect your credit score.
What does this mean?
Although we cannot emphasize enough that you should never avoid moving because you are concerned about the impact on your credit score, a temporary drop is almost unavoidable.
This is because, for a short time following the relocation, a new address can make it more difficult to authenticate your identity.
When you move, you must contact all of your account providers to update your address, so some accounts will be registered to your new address while others will be registered to your old address for a few weeks or months.
You’ll also need to register to vote at your new address, which takes only a few minutes but takes 6-8 weeks to show up on your credit report.
While your new voter registration is being processed, your previous address will continue to display on the electoral roll. When your accounts all change addresses, it can be difficult to remember which address you reside at, leaving you open to both inadvertent and deliberate misuse of your information, both of which can have a negative impact on your credit score.
It won’t be a big dent, and it won’t last long, but it will happen.
What can be done about it?
The biggest healer with this one is time, as you only have to wait for the admin to catch up with you.
However, by planning ahead of time whenever possible, you can reduce the harm and speed up the healing process.
As soon as you’ve moved into your new place, start the process of updating your account information, and register to vote online. Setting up a redirect service with Royal Mail to ensure that all of your mail is routed to your new address can help to reduce the possibility of it ending up in the wrong hands.