Why your credit score can fall despite paying your card dues and loans on time

Credit bureaus consider multiple factors while calculating your credit score. While the loan repayment history is believed to receive the maximum weightage among all the factors, any adverse event related to other aspects can significantly reduce your credit score.

Here are five possible reasons why your credit score may drop despite repaying EMIs or credit card bills by the due date.

Maintaining the credit utilization ratio

Credit Utilization Ratio (CUR) is the proportion of the total credit limit utilized by you. Since lenders generally consider a credit utilization ratio of over 30 percent as a sign of credit hunger, bureaus tend to reduce credit scores by a few points on breaching the 30 percent mark.

If your credit card spends tend to frequently exceed 30 percent of your credit limit, request your card issuer to increase your credit limit or opt for an additional credit card. Doing so would increase the available credit limit and, thereby, reduce your credit utilization ratio, provided you do not increase your card spends after obtaining the additional credit limit.

Also read: How many credit cards should you have?

Submitting multiple requests to lenders 

Making multiple credit enquiries within a short span of time can lead to a significant decrease in your credit score. Each time you apply for a loan or credit card, the lender assesses your creditworthiness by accessing your credit report from the credit bureaus. Such credit report requests initiated by the lenders are termed as hard enquiries, which pull down your credit score by a few points.

Instead of directly applying for loans or credit cards with multiple lenders and card issuers, visit online financial marketplaces to compare various loan or credit card offers available for your income, credit score, job profile and other eligibility criteria. Online marketplaces would also pull out your credit report while offering you numerous loan or credit card options, but such requests are treated as soft enquiries and are not considered by the credit bureaus while calculating your credit score.

Also read: Why credit scores alone may not be the best way to assess loan borrowers

Credit report errors

Any clerical error or misinformation on the part of your lender or the bureau can adversely impact your credit score. Similarly, any fraudulent loan or credit card application or transaction made in your name could also reduce your credit score. The only way to spot such discrepancies is by checking your credit report at regular intervals, ideally at least once in three months. Doing so would allow you to detect misinformation or clerical errors, if any, in your credit report and take them up with the lender or the concerned bureaus for rectification.

As credit bureaus allow one free credit report every year, consider accessing your free credit report requests from each of the four different bureaus across the year in such a way that you get one free credit report in each financial quarter. Alternatively, you can visit online financial marketplaces for pulling out your credit report along with their monthly updates.

Also read: Why your credit score differs across bureaus

Failure to monitor co-signed or guaranteed loan accounts

Whenever you agree to become a co-signer or guarantor to a loan, it makes you equally liable for timely repayment. Any delay or default in the repayment of the co-signed or guaranteed loan will impact your credit score as well. Hence, ensure that you regularly review the repayment activities of the loans accounts co-signed or guaranteed by you.  Reviewing your credit report at regular intervals would also help in tracking the repayment activities of the guaranteed or co-signed loans.

Higher share of unsecured loans in credit mix

Credit mix refers to the ratio of your secured and unsecured debt. Consumers with higher share of secured loans tend to be scored more favourably by credit bureaus, whereas those with a greater proportion of unsecured loans may be viewed more cautiously by lenders. Hence, always try to create a healthy credit mix to the extent possible.