5 Key Reasons Your Credit Score Dropped Despite Timely Payment

Your credit score is a key part of your financial health, with the potential impact from the approval of a loan to a credit card rate. While you need to make on-time bill payments in order to maintain a healthy score, that is only one part. There are many reasons your credit score could plummet unexpectedly, even when you pay bills on time.

1. High Credit Utilization Ratio

The credit utilization ratio is also the most important factors that determine your credit score. This ratio compares the amount of credit you use to your total available credit. Keeping the ratio at 30 per cent or lower is the advice of experts for a good credit score. When you find yourself with balances on your cards all the time and using them to the limits, your credit score will be negatively affected even when you're making timely payments. To enhance your score, work to pay down balances and have low usage.

2. Applying for Multiple Credit Accounts

When you open several new credit accounts in a short period, it triggers a hard inquiry on your credit report each time, which can temporarily lower your score. As a single inquiry may not be very damaging, multiple queries in a brief period of time may indicate to lenders that you are financially over-leveraged. To avoid unwarranted drops in your score, it’s better to minimize new credit applications and space them out over time.

3. Changing Credit Limits

Your credit score can still be impacted by a reduction in credit limit. Lenders may reduce your credit limit for a variety of reasons, such as adjustments to your spending habits or shifts in your financial situation. Even if your spending hasn't increased, a lower limit could raise your credit utilization ratio. To manage this, try to keep your credit utilization low and be proactive about monitoring any changes to your credit limits.

4. Closing Unused Credit Cards

Closing outdated or inactive credit cards may appear to be an suitable method to make finances less complicated but it can negatively affect your credit score. It lowers your overall available credit, and raises your credit utilization ratio, which is a factor that affects your score. It also reduces the average age of your credit history, and that also affects your score in a negative manner. Weighing these aspects can help you make the choice that's right for your financial goals.

5. Mistakes on Your Credit Report

One of the most frequent reasons that a score can decrease suddenly is the presence of mistakes on your credit report. The inaccuracy may involve wrong personal details, accounts not yours, or incorrect payment history. These kinds of errors can have a negative effect on your credit score, making it important to check your credit report periodically. When you notice an error, dispute it with the credit reporting bureau so that your score is accurate.