Fluctuating credit scores: why does this happen?

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

Credit scores are not set in stone forever and can change over time. As an individual's financial position changes, fluctuations start happening to scores to mirror these changes. A credit score is a snapshot of an individual's financial position at any given point in time. By monitoring your credit score you will be able to have a better understanding of the types of credit that you will be able to apply for in the future e.g. mortgages or online loans.

What causes credit scores to fluctuate? Fundamentally, the changing information available in your credit report causes your credit score to fluctuate. There are several points to consider before you can understand how this applies to you. Read on to further understand fluctuating credit scores and more importantly why does it happen.

Graph showing upwards trend

Repayment history

The most influential factor that results in changes to an individual's credit score is repayment timings i.e. how often you are able to make repayments without your account falling into default. As this is a crucial aspect when it comes to determining whether an individual is a responsible borrower, a positive repayment history can only result in an improved credit score. Once defaults start to be recorded on credit reports, credit scores start reflecting this by moving downwards. In the same respect, once late repayments start diminishing from a credit report, positive impacts will be reflected in your credit score.

Fluctuations in your credit utilisation ratio

As we previously explored, credit utilisation refers to the ratio of credit being used as a proportion of the total credit allowance available to you at any point in time. By making substantial credit purchases, the amount of credit being used will increase resulting in a higher credit utilisation ratio. This is assuming that your total credit allowance remains unchanged i.e. you have not made further credit applications and/or closed any credit accounts. In the same respect, by paying off outstanding credit e.g. credit card debt, the amount of credit being used will decrease resulting in a lower credit utilisation ratio.

An increase in your utilisation ratio will result in a downward fluctuation to your score and vice versa. A steady upwards trend in your utilisation ratio could indicate that you are in financial difficulties i.e. borrowing more than you can repay. This will therefore result in a lower credit score. The opposite also holds true. The steady decrease of your utilisation ratio could demonstrate that you are a responsible borrower and are able to repay your debt. This will therefore result in a higher credit score.

An increase in your credit utilisation however does not always result in a lower credit score. The exception exists when you start increasing your utilisation from 0%. This demonstrates that you are utilising the credit available to you and thus results in the establishment of a borrowing and repayment history which provides the building blocks for your credit report and your credit score.

Spending and repaying credit is not the only way to adjust your credit utilisation ratio and your credit score. Amending credit limits and opening or closing credit accounts will adjust your overall credit allowance thus impacting your utilisation ratio. By reducing your credit limit and/or closing credit accounts you will increase the proportion of credit used to credit available resulting in a higher utilisation ratio. By increasing your credit limit and/or opening credit accounts you will reduce the proportion of credit used to credit available therefore decreasing your utilisation ratio.

Due to the constant changes happening to your credit balances (i.e. through repaying and using your credit), credit utilisation has a continuous and significant impact on the fluctuation of your credit scores.

Increasing number of credit applications

A surge in the number of credit applications made in a short time period could result in a downward movement to your credit score. This demonstrates that the applicant is in serious need of credit which could be indicative of someone in financial difficulty. Increased volumes of applications could also leave a trail of 'hard searches' on your credit report resulting in a decrease in your credit score.

Recordings on your credit report

Every entry added to a credit report results in the potential movement of the associated credit score. An increase in negative entries could therefore result in the downward movement of your credit score and vice versa. Legislation in the UK dictates that entries should only appear on an individual's credit report for a maximum of 6 years so you should always ensure that any entries negatively impacting on your score are removed where possible.

The duration for which you hold a credit account can also result in fluctuations to your score. Holding credit account(s) for extended periods, with reasonable repayment histories, can indicate a stable financial position and thus that you are a responsible borrower.

Scoring between CRAs

Each Credit Reference Agency (CRA) has a unique way of calculating credit scores. Therefore, movements may occur on a score obtained from one CRA but not another. As each CRA may hold different information for an individual, a change in any of the factors discussed above may only be reflected on a credit score from one agency and not another.

Now that we have explored why credit scores fluctuate, we can further explore how you could go about bettering your credit score. Read the next instalment in this series to find out more.