It’s a good practice to check your credit score from time to time. You can do this online for free, or you can contact one of the three credit bureaus to get your full credit report. You’re able to access a free copy of your full credit report once a year, outside of this you may need to pay to access the report. The main benefit of checking your credit score is that it can alert you in case you need to take any necessary corrective steps.
What drops your credit score?
If your credit score dropped for no reason, it might make you start to worry why. One way you can avoid being surprised by changes in your credit score is to keep track of all financial transactions which may result in a credit enquiry. Suppose you missed paying a utility bill while on holidays and the supplier couldn’t reach you, resulting in the late payment being classed as a default. Your provider will likely report the default to the credit reporting agency, but at a later time. This may cause your credit score to go down when the credit reporting agency gets the information. Because of the delay between your lack of payment and when your score goes down, it can seem random.
The credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. They will take into account both the credit enquiries these companies make as well as your payment history with them. The agencies may also factor in your employment history as well as the number of years you’ve had a credit file open. Business owners may also find that their credit report includes a commercial section. Understanding the specific reason your credit score has dropped - or increased, for that matter - can therefore require a bit of research.
Some of the common incidents that can negatively impact your credit score include:
- Applying for too many credit cards or loans.
- Increasing the limit on your credit card.
- Making a late payment, especially if the payment is $150 or more.
You need to remember that there are also incidents that can affect your credit score positively, such as:
- Completing all loan repayments and closing your loan.
- Cutting down the number of credit cards you own.
- A previously reported default is cleared from your file due to the expiry of it’s reporting period.
If you access your credit report and still don’t fully understand what has caused your credit score to drop, consider consulting a financial counsellor to help.
How to find out why your credit score dropped
It’s advisable to maintain a personal record of any transactions that may affect your credit score, including the date of the transaction and the amount spent, borrowed, or repaid. By doing so, you may be able to connect changes in your credit score with these transactions. However, you need to also remember that creditors don’t always report incidents to the credit agency immediately. So that you’re on top of this information, you should consider checking your credit score regularly.
There are multiple websites that you can use to check just your credit score, including RateCity. However, you have to send a request to one of the credit reporting agencies directly to get your credit report.
These agencies offer you the ability to access your full credit report once a calendar year for free. Any additional requests for your full report will come at a cost. The agency may offer additional services such as credit score change alerts for a cost as well. This information may be useful to get a better understanding of what makes your credit score drop or rise. However, you may need to be familiar with some financial terminology to fully appreciate it.
What to do if your credit score dropped after credit limit increase
If you recently requested and were approved for a credit limit increase on your credit card you may have noticed your credit score to decreased. You may want to check how this decrease will affect how lenders see you as a borrower. While your credit score is usually a number between 0 and 1200, you should ideally have a score above 480, or in the upper 60 per cent of credit scores. The exact range depends on the credit reporting agency.
If your credit score drops below this range after a credit limit increase, you can consider the following steps to improve it:
- If you only have one credit card: You can request a credit limit decrease with your provider if you don’t have a high outstanding balance. Or you can pay off as much of the balance as possible before requesting a lower credit limit.
- If you have more than one credit card: You may want to pay off the outstanding balance on the other card(s) and cancel them. In general, keeping fewer credit cards decreases the risk of any negative impact on your credit score.
