Why does your credit score drop even when you pay on time?

Summary

Even if you pay your credit card bills and loan repayments on time, your credit score can still drop because the payment history is only one of the severafactors that influence your score

A number of factors which impact credit score are age of loans, credit utilisation, age of accounts and new credit card applications, among others

Merely paying your credit card bills and loan instalments on time does not necessarily mean your credit score will remain in a comfortable range. It can decline even when you are regular in your repayments.

This is because a credit score is a function of several factors, including loan payments. Other factors that impact credit scores include credit utilisation, account age, and new credit card applications, among others.

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Credit score is impacted by these as well

Credit utilisation ratio: This measures how much of the credit you are using. It is recommended to see lower credit utilisation, typically under 30% overall and per card.

Clearing debt: Paying off debt can damage your credit score. This leads to shortening of credit history.

Closing old credit card accounts: If you close your old credit card accounts, it brings down the average age of your accounts.

New credit card applications: When you apply for a new credit card, it leads to a hard inquiry, thus impacting your credit score. Even opening a new account lowers your average account age.

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Change by the lender: Sometimes your lender can lower your credit limit, which can bring down your utilisation. This adversely impacts your credit score.

Identity theft: Although it is not very common, it may happen to some. If a fraudster is misusing your credit profile to take a loan, it shows up on your credit report.

Disclaimer: MintMoney 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. MintMoney 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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