Here, we list the reasons for a sudden drop in credit score and suggest ways to fix it.
Credit score: These could be the reasons for the drop
I. Failure to make payments on time: Whether it is a credit card payment or repayment of a loan, any delay or default has an adverse impact on the credit score. Default in payment is typically one of the most common causes for a sudden drop in your creditworthiness.
II. Closing of an old account: When you close an old account, it can lead to an adverse impact on your credit score. This is because the closure of an old account causes a fall in your overall credit limit.
III. Overutilisation of credit limit: Ideally, credit utilisation should stay below 30 per cent. When it crosses this threshold, it reflects badly on your credit score. So, raising the credit utilisation beyond a point – say 50 per cent is detrimental to your credit score.
Now, we will describe some steps you can take to improve the score.
How to improve score: Key steps to follow
I. Clear your dues: At the outset, you need to pay your credit card bills on time. If there are other dues, such as loan EMI, then you need to pay that as well as a first step towards improving your score.
II. Reduce your credit utilisation: Once your bills and dues are clear, you need to bring down your credit utilisation to 30 per cent or lower. This is quite important for a high credit score. For instance, for a credit card limit of ₹10 lakh, ideal credit utilisation is ₹3 lakh or less.
III. Refrain from sending new credit applications: You should limit applications for new credit to avoid hard inquiries, which can impact your credit score. If you still want to apply, it is recommended to space out applications and only apply for what you need.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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