Why Does My Credit Score Decrease?

Short answer: Your credit score can decrease due to factors like missed payments, increased credit utilization, new credit inquiries, or identity theft.

Credit scores in India are managed by Credit Information Companies (CICs) such as CIBIL and Equifax. These scores influence your ability to secure loans and credit cards. Here’s why your credit score might drop:

1. Late Payments: Making payments late can significantly harm your credit score. In India, a single missed payment or delayed EMI can negatively impact your credit report. Banks and lenders report such instances to CICs.

2. High Credit Utilization Ratio: Just like in the provided sources, the utilization ratio is crucial. If you use more than 30% of your available credit limit across all cards, it can signal financial distress to creditors. For instance, if you have a total credit line of ₹50,000 and are using ₹40,000, your utilization rate is 80%, which is high.

3. New Credit Inquiries: Applying for multiple loans or credit cards in quick succession can lead to frequent inquiries on your credit report. This activity might be flagged as a sign of desperation for funds, hence lowering your score temporarily.

4. Identity Theft and Fraud: If someone uses your identity to open accounts or make purchases without your consent, it can reflect negatively on your credit report. Regularly monitoring your credit reports from CICs is essential to catch such fraudulent activities early.

5. Account Closures: Closing old credit cards can affect the average age of your credit accounts, which is a positive factor for credit scores. Additionally, closing an account might increase your overall credit utilization if you have other high-balance cards open.

6. Settlements and Write-offs: If you settle debts or have write-offs on your credit report, these entries can negatively impact your score. Settlements are less favorable than paying off debts in full but better than write-offs.

7. Legal Issues: Being involved in legal proceedings related to debt recovery can also harm your credit score. Courts and law enforcement agencies may report such instances to CICs.

To maintain a healthy credit score, it’s advisable to:

- Pay bills on time.

- Keep credit card balances low.

- Avoid frequent new credit applications.

- Regularly check your credit reports for inaccuracies or fraudulent activities.

- Maintain a mix of loan and credit card accounts, as this can positively affect your score.

By understanding these factors and taking proactive steps, you can better manage your credit health in India.

Sources: Not-so-obvious causes for a dropping FICO score| myFICO · Why Did My Credit Score Drop? · Why Did My Credit Score Drop for No Reason | Equifax · Why Did My Credit Score Drop | TransUnion · Why Did My Credit Score Drop? | Discover

This explainer was researched and drafted by the Investdesk AI Desk to answer a question readers commonly ask. It is general information, not personalised financial advice.