Wondering why your credit score dropped unexpectedly? Find out why credit scores change and how they impact car finance applications.
Are you wondering why your credit score went down when nothing changed? In this guide, we’ll explore why credit scores can fluctuate unexpectedly, what it means for car finance, and how you can address any issues to stay on track.
Your credit score is one of the main factors that lenders examine when deciding whether to approve your car finance application, so spotting an unexpected drop can be frustrating — especially if you haven’t made any obvious changes.
However, even if you’ve been keeping up with payments and haven’t applied for new credit, there are still many reasons why your score might shift. From updates to your credit report to minor changes in account balances, credit scores are influenced by a wide range of factors.
It can be surprising to see your credit score drop when you haven’t made any obvious changes, like applying for new credit or missing payments. Let’s look at some of the reasons why this can happen.
Credit utilisation
Your credit utilisation refers to how much of your available credit you’re using. For example, paying off a large debt can lower your utilisation ratio and improve your credit score.
On the other hand, even if your spending hasn’t increased, a reduced credit limit from your provider can cause your utilisation ratio to rise. This may lead to a temporary dip in your score, even though your habits haven’t changed.
New credit inquiries
Every time you make a full application for credit, whether it’s for a car loan, personal loan or credit card, a hard check is made on your credit report. This can cause a small, temporary drop in your score. In contrast, a soft credit check - essentially a snapshot of your financial history - won’t impact your credit score.
Most lenders will run a soft credit check when you make your initial request for a car finance quote, to help them decide whether to offer you finance. The hard search usually comes later, when the lender is making its final lending decision.
If you haven’t recently applied for car finance, the drop could be from inquiries you’ve made that are related to other financial products, such as personal loans. Remember, as long as you borrow sensibly and avoid making multiple applications at once, the impact shouldn’t last too long.
Account age and paying off loans
The length of your credit history also plays a big part in your score. If an old account is closed or your credit report is updated, the average age of your accounts may change and could affect your score slightly.
Paying off instalment loans, like car finance, mortgages or student loans, can also have a minor impact. Closing an account with a long, positive history may cause your score to dip temporarily, even though paying it off is a great financial move in the long run.
Changes in your credit report
Credit reports are regularly updated with new details, such as account statuses, balances or personal information like address changes.
Even minor updates, like a creditor adjusting your credit limit, can influence your score. These changes might seem unrelated to your finances but can still have an impact.
Credit report errors
Mistakes on your credit report can also cause unexpected drops. This might include:
Incorrectly reported late payments
Inaccurate balance amounts
Fraudulent accounts or activities
Suspicious activity, like identity theft, is another significant reason your score might suddenly drop. A large, unexplained shift in your credit score is often an indicator of fraud. If you think you’ve been a victim of identity theft, visit https://www.actionfraud.police.uk/.
Missed or late payments
Missed payments might not show up on your credit report immediately, but when they do, they can significantly harm your score.
Even one late payment can make a big impact, especially if you’ve had a strong repayment history up until that point. Late payments are one of the most damaging factors, so staying on top of deadlines is vital for maintaining a healthy credit score.
If your credit score isn’t where you’d like it to be, take a look at our guide to improving your credit score.
As we’ve mentioned, your credit score will play a big part when the time comes to apply for car finance. It’s one of the main tools lenders use to assess whether you’re a reliable borrower and to determine the interest rate and terms they can offer you.
A sudden drop in your credit score, even a small one, can have a ripple effect when you’re applying for finance. It could mean:
Higher interest rates
A lower credit score signals greater risk to lenders, which can lead to higher rates that increase the overall cost of borrowing.
Denied applications
In some cases, a dip in your score may result in lenders declining your application outright.
Restricted loan options
You might still get approved, but with fewer choices when it comes to the type of loan or repayment terms available.
That said, many car finance companies offer options for borrowers with less-than-perfect credit scores. The important thing is to demonstrate your financial stability and make efforts to improve your credit profile wherever possible.
As we’ve seen, there are many reasons why your credit score may fluctuate slightly over time - and there is usually no cause for concern.
Keeping a regular eye on your credit score, paying all your bills promptly and in full, and choosing your timings wisely when it comes to making any new applications, will help you to maintain a healthy credit profile and keep you in good financial shape.
How can I quickly improve my credit score before applying for a car loan?
To give your credit score a quick boost, focus on paying down any outstanding debts and make sure all your payments are made on time. Check your credit report at regular intervals for any errors or suspicious activity and address them as quickly as you can. Finally, staying within 30% of your credit utilisation limit can also make a big difference.
Why does my credit score differ between credit agencies?
Each credit reference agency collects slightly different information and uses it in different ways to calculate your score, so variations in your credit rating are to be expected.
Can I get car finance if my credit score has dropped recently?
Many lenders specialise in offering car finance to those with fluctuating or lower credit scores. It could be worth putting down a larger deposit or using a guarantor to strengthen your application and improve your terms.
What do I do if I find an error on my credit report that caused the drop?
If you spot an error on your credit report, contact the credit rating agency or creditor responsible for the report immediately. Dispute the error, provide any supporting evidence you have, and follow up to ensure it gets corrected. This can help restore your credit score.
