Why did your credit score drop unexpectedly? Here’s how to recover fast | Mint

A sudden drop in your credit score can be a shock, especially when you do not know why this has occurred. For borrowers in India, a good credit score is the key to taking personal loans and credit cards at the minimum rate of interest possible. That is why knowing about your credit score drop and how you can recover from it is necessary.

What are the common reasons due to which credit score dips?

Some of the usual causes that can lower your credit score are:

• Missed or late payments: Missed payments or late payments are among the biggest reasons for a poor credit score. Payment history accounts for about 35% of your credit score, and even a single missed payment will have significant weight. Taking care to pay on time and having reminders set up should eliminate this risk to zero.
• High credit utilisation ratio: Your credit utilisation ratio, or the proportion of the credit you are using versus how much credit is available, is one of the components that go into determining how your score will be computed. Ideally, it should be below 30%. Big purchases on credit cards can increase your ratio, which decreases your score considerably. The idea is to ensure that you need to be careful that you are not overly dependent on credit.
• Too many credit applications: Having too many credit card or loan applications in a short period of time can lead to multiple hard inquiries on your credit report and higher EMIs on future loans. This will lower your score temporarily because lenders will view you as a riskier applicant to give a loan.
• Closing older credit accounts: It is important to remember that closing old accounts will reduce your overall credit limit and your utilisation ratio, which damages your score. Avoid closing old accounts so that you will have your credit history to fall back on for showing a clean and consistent credit profile. 

What are the steps to bounce back?

If you find that your credit score has dropped unexpectedly, there are a number of things that you can do in an attempt to recover:

• Make on-time payments: Pay all future payments on time. Having automatic bill payments can assist in not missing a payment due date.
• Decrease credit utilisation: Clear existing debt and refrain from making large purchases with credit cards until your utilisation ratio is better.
• Limit new applications: Do not apply for new loans or credit cards unless necessary. This will avoid further hard inquiries on your account.
• Check your credit report from time to time: When you check your credit report, you get alerts about fraud or mistakes that are affecting your score. You can also get a free credit report at several leading credit bureaus for getting clarity about your credit profile and how you are required to go about maintaining the same in future. 

Therefore, it is clear that a dip in your credit score may be shocking still, being aware of the reasons and acting early can assist you in bouncing back quickly. With timely payments and monitoring your expenses, you can ensure having healthy credit in the long term.