Why is my credit score going down even though I pay on time?

Posted on: 06 Aug 2024

You have been careful to pay all of your payments as directed; so, why is your credit score declining? This may be a somewhat perplexing and even frustrating process. Since your credit score impacts loan approvals, interest rates, etc., changes in your credit score are significant since it is among the most essential determinants of your financial life.

These are some possible reasons your score is declining even if you pay your bills on time. In this sense, understanding the elements of your score can help you to discover the actual cause behind it.

Credit Utilization Ratio

Out of all the things that can affect your credit score, your credit utilization ratio is the most significant. This calculates the percentage of the credit limit you have outstanding at any time. We should use not more than 30% of the available credit limit as suggested by the experts.

If you have borrowed more recently and say you made a purchase or paid for an emergency bill on your credit card, it increases your credit usage. The mere fact that you have a higher balance even if it’s one that you are paying off responsibly can lower your score in the short-run.

If you pay the balances again, your score should rebound in the future or even go back to normal. As much as possible, aim to maintain low balances in the future.

Opening New Credit Accounts

This means that when you open several new credit accounts within a short time, this will lower your credit score. Any credit application and any new account you have will be considered an inquiry and will be reflected on the credit report that is being issued to you.

If there are many new accounts and credit checks within a short period, the lenders are likely to perceive the individuals as high-risk, and this will affect the score. Do not open up many new credit accounts, unless there is no other way out. Also, it is recommended to delay the application of new materials by at least six months apart.

The credit account status shows variations

This means that, if one of your credit accounts changes its status, whether from open to closed or from positive to negative status, your score will be affected.

Closing of accounts reduces the total amount of credit available to you, which increases your credit utilization ratio. However, if an account is overdue or is turned over to a collection agency, this negatively impacts your credit history.

It is always advisable to ensure that an account is kept open and active as long as its balance remains positive. Ensure that accounts are not shut down because of their inactivity for a long time. If an account has been closed or sent to collections, explain this to the lender and start rebuilding the credit as soon as possible.

Common mistakes made on credit report

Another thing that you might not know is that there are errors in your credit report that can cause a drop in your credit score. When a lender gives you a bad score on one of your accounts that you never defaulted on, this reduces your score in ways you never anticipated.

You should also regularly monitor your credit report to make sure that nothing wrong is being reported about you. If you notice any mistakes, begin to file disputes with both the lender and the credit bureau as soon as possible. This can be effective in improving your score once corrections have been made to the answers provided. But, it is also vital to sign up for credit monitoring as well to detect problems on time.

New Formulas for Computing Credit Scores

FICO, the company that generates your credit score, updates its algorithms occasionally. At times, the scores change for many consumers to reflect the risk levels thus ensuring the consumers regulate the scores appropriately.

Your behavior as a borrower remains the same, but these calculation edits can affect your score. Often, such changes to formulas affect those with a high or low score more than others do. If your score has gone down, you need to find out if there were some changes made to scoring models.

Other Factors That Affect Your Score

Aside from the common reasons outlined above, there may be other factors dragging your credit score down, like: Aside from the common reasons outlined above, there may be other factors dragging your credit score down, like:

Having debts that are nearly within the period allowed by law for collection
The fifth indication is an increase in balances on existing accounts.
Changes in income or employment status
Applying for a credit card in the department store
Entering into installment loans or financing arrangements

The number of variables that can be used in credit scoring algorithms is vast, so pay attention to anything in your financial status that has recently shifted if you are trying to understand why your credit score has dropped.

In Summary

It can be rather frustrating and daunting to notice that your credit score is going down while you are still managing your debts appropriately. However, more often than not, rationalizable attributes such as higher balances, new credit lines, or credit report discrepancies are at fault and not payment history.

Try to keep credit utilization as low as possible, avoid applying for new credit, and check your credit report regularly. Other factors such as calculation changes, and new debts should also be taken into account. If you focus on these areas, your score should increase in the future, especially if you continue making timely payments. The key message is to remain patient and follow the right credit management behaviors.