A credit score is a measure of your ability to get a loan or financial aid. A high credit score has many benefits. While most of us hold a credit card to increase our credit score by paying bills on time, this may not always be the case. Paying your bills on time doesn't necessarily improve your credit score. There are many reasons why your credit score can drop even after paying bills on time. In this article, we will look at some of the main reasons why your credit score is low.

Credit mix

For a high credit score, diversity is indispensable. There are two types of loans: secured and unsecured. Unsecured loans are personal loans, credit card loans, loans from apps, etc., while secured loans are business loans, home loans, etc. A high amount of unsecured debt compared to secured loans can have a bad effect on your credit score even if all of your payments are creditworthy.

Errors in your credit report.

Not all of the reasons that can have a bad effect on your credit score are related to money. For example, a wrongly marked default or non-updating of account closure, etc. can affect your credit score. This inaccuracy can cause your credit score to go down. So always check your credit report and fix all the anomalies as soon as possible.

Previous Defaults

A credit score is a number that reflects how disciplined you are in your financial behaviour. Even if you're paying all your bills on time right now, past defaults or late payments can cause your credit score to drop. Even if your credit score is going down because of your past behaviour, it's important to continue making payments now and wait for your score to improve, even if it's gradual.

Loans written off / settled

Your credit score shows how much you can be trusted in financial matters. So if you have a loan that has been written off or a loan that is being settled without paying the full amount, it can have a bad effect on your credit score.

A number of credit applications

Applying for multiple credit cards or loans in a short period of time can adversely affect your credit score. When you apply for a credit card or loan, a thorough investigation is done on your credit profile. More enquiries in a short period of time can cause your credit score to drop.

Credit utilisation ratio

The credit utilisation ratio is the ratio of your credit limit to your actual credit. A higher credit card payment can lower your credit score. This is because, if you pay all the bills on time, large bills may indicate financial difficulty in the future. It is advisable to use only 30-40% of the available credit limit.

Guarantor on loan to others

Being a guarantor on someone else's loan will lower your credit score. This liability can directly result in a lower credit score as it immediately appears on your credit report. If the borrower misses a payment, this will also show up on your credit report, which can result in a lower credit score.

It's always safe to pay your bills on time, even if there are any reasons that could cause your credit score to go down. Consistency is key to a good credit score.