Credit score is a matrix by which your eligibility of a loan or any other financial aid is measured. Having a high credit score has many benefits. Even though most of us carry a credit card with us to increase the credit score by paying bills on time, it does not always work. Paying bills on time does have its effect but doing only that won't have the desired effect. There are many reasons why your credit score might be declining even after paying bills on time. In this article lets see some of the top reasons why your credit score declines.
Credit mix
For a high credit score, variety is indispensable. There are two types of loans: secured and unsecured loans. Unsecured loans are personal loans, credit card loans, loans from apps etc, while secured loans are business loans, home loans etc. Having a high amount of unsecured loan when compared to secured loans will affect your credit score badly even if all your payments are made on time.
Inaccuracies in your credit report
There are some errors other than monetary ones that can affect your credit score badly. For example a wrongly marked default or an account closure not updated etc. These inaccuracies can make your credit score decline. So always check your credit report and solve all the inaccuracies as soon as possible.
Past defaults
A credit score is a number that mirrors how disciplined you are in your financial behaviour. Even though you are paying all your bills on time now, past defaults or late payment can make your credit score decline. Even though your credit score is declining due to your past behaviour it is important to keep up with the payments now and wait for your score to be better which will be gradual but it will improve for good.
Written-off/settled status
Credit score shows how much to trust you in terms of finance. So if you have a written off loan or a loan that is settled by paying less than the full amount it will affect your credit score badly.
Multiple applications
Applying for more than one credit card or loan in a short period of time will have a bad impact on your credit score. While you apply for a credit card or loan a thorough inquiry is done on your credit profile. More enquiries in a short time period will decline your credit score.
Credit utilisation ratio
Credit utilisation ratio is a ratio of the actual credit and your credit limit. Having high credit card payments when compared with your credit limit can make your credit score decline. This is because even if you are paying all the bills on time, huge bills may indicate future financial strain. It is always ideal to only use 30-40% of the available credit limit.
Guarantor on a loan
Being a guarantor on loan will make your credit score low. This obligation will directly result in a low credit score as it appears immediately on your credit report. And if the loaner misses a payment this will also be shown on your credit report which will result in an even low credit score.
To conclude it is always safe to pay your bills on time despite any reason that may be bringing down your credit score. Consistency is the key in having a good credit score.
