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If you’re a credit score watcher, you may know that all-important three-digit number at any given time. If you don’t keep track of your credit score, you should. Monitoring services are inexpensive and can keep you on top of your credit score and alert you to any issues. But can your credit score change if you haven’t done anything to change it and your financial behavior has been constant? The answer is yes. Here’s why.
What Determines Your Credit Score?
Your credit score is a calculation based on your credit report. You have three different versions of your credit report. One is with Experian, one with TransUnion and the other with Equifax. These reports are usually not identical and the three may never align perfectly. Also, depending on what calculation method is used to determine your score, it won’t be consistent across all three reports at any given time.
Despite minor differences in scoring, there are five primary factors that drive your credit score. Your payment history, the amount of money you owe compared to your total lines of credit, and how long you’ve had a credit history matter. The age of the accounts also factors into the calculation. The final two components are the mix of types of credit you have and whether or not you’ve opened any new accounts.
Changes Due to Credit Utilization
Utilization is a ratio of how much you’re carrying on your credit cards compared to your total credit limits. If you have a total of $20,000 in credit lines and are carrying $4,000 in credit card debt, that’s a 20% utilization. It’s better to keep it lower than that, but that’s not terrible. But say you have that $4,000 in debt and you decide to close a credit account with a $4,000 limit.
That changes your utilization from 20% to 25% and can lower your score. On the other hand, if you open a new account or have credit limit increases so you now have $40,000 in credit and the same $4,000 in debt, that drops your utilization to 10% and can boost your credit score. With no change in debt, but a change in your credit lines, your score can shift when all else is the same.
Changes Due to a Negative Item
Paying your bills on time is great but for most bills such as rent, utilities, cell phone, and cable, an on-time payment doesn’t benefit your credit score. However, if you miss a payment and get behind or forget to pay a medical bill, if the creditor hands your account over to a collection agency, you can have a derogatory item reported on your credit and your score can drop.
Change Due to Credit Inquiries
There are two types of credit checks – a hard pull and a soft pull. A soft pull may occur when you’re being considered for a pre-approved card or other offer and you don’t even know you were being evaluated. Soft pulls will not be recorded on your credit history and don’t have a negative effect. A hard pull is when you apply for a new account and a creditor runs a credit check on you.
A hard pull will temporarily lower your credit score whether you open the account or not and whether you were approved or not. A hard inquiry can knock five to 20 points off your FICO score. If you have several hard pulls, that can decrease your score even more when nothing about your spending or other financial behavior changed. Over time, the effect of a hard pull will lessen.
Monitor Your Credit Report So You Know If Something Changes
It’s not safe to assume that your credit score is static. Signing up for a low-cost credit monitoring service is the best way to know if your credit report is healthy and one of the best ways to alert you to an issue. If someone opens up an account using your identity, you’ll be notified of the new account and can shut it down. If a creditor reports something erroneous to your report, you’ll know and can correct it.
For those consumers just coming out of a bankruptcy, embarking on a plan to improve your credit and monitor your score so that you can get it back to the level you want is critical. To find out more about improving your credit score after bankruptcy, contact Credit Score Keys today. Call 919-495-2365 today for a free consultation about cleaning up your credit and getting back on track.