Wondering why your credit score goes up and down? We have the answer! Check out our blog post to find out what could be causing fluctuations in your score.
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Understanding How Credit Scores Are Calculated
Your credit score is a number that indicates the risk level associated with lending you money or approving you for a financial product. Companies use credit scores to make decisions about whether or not to extend you credit. A high credit score means you’re a low-risk borrower, which could lead to a lower interest rate on a loan. A low credit score could lead to a higher interest rate and could mean you won’t be approved for a loan at all.
The difference between a soft inquiry and a hard inquiry
The difference between a soft inquiry and a hard inquiry is often misunderstood. Hard inquiries can negatively impact your credit score, while soft inquiries will not.
A hard inquiry is when a lender checks your credit report with the intention of extending you credit. This could be for a new credit card, a loan, or even a mortgage. When a lender makes a hard inquiry, your credit score will usually drop by a few points.
A soft inquiry is when someone checks your credit report but isn’t considering extending you any new credit. This could be for something like an employment background check or when you check your own credit score. Soft inquiries have no effect on your credit score.
The five factors that make up a credit score
Your credit score is a number between about 300 and 850 that creditors use to help them decide whether to extend you credit. The lower your score, the more likely you are to be denied for a loan or credit card and to pay a higher interest rate if you are approved.
But what goes into that all-important three-digit number? That’s where things get a little more complicated.
The five factors that make up a credit score are:
-Payment history (35%): Do you pay your bills on time?
-Credit utilization (30%): How much of your available credit are you using?
-Credit mix (15%): What types of debt do you have?
-Length of credit history (10%): How long have you been borrowing money?
-New credit (10%): Have you applied for any new lines of credit recently?
Why Your Credit Score Might Go Up
There are a lot of things that can affect your credit score, and some of them might surprise you. If you have a high credit score, it’s important to understand what might make it go up or down so you can keep it in good shape. Here are a few things that can cause your credit score to go up.
You’ve been paying your bills on time
Your payment history is the record you’ve established by either paying or not paying your bills on time. It accounts for 35% of your FICO® Score* calculation, making it the single most important factor in determining your score.
If you have a history of late or missed payments, it will take some time and consistent payments to improve your score. The good news is that as soon as you start paying on time, your payment history starts to improve, and as time goes by, the impact of past missed payments will lessen.
You’ve paid off a loan or credit card balance
Your credit score could increase when you pay off a loan or credit card balance because it shows that you’re using less of your available credit. Additionally, paying off debt can reduce your credit utilization ratio, which is the amount of debt you’re using compared to your overall credit limit. A lower credit utilization ratio can help improve your credit score.
You’ve had a credit limit increase
If you have a credit card, you might have noticed that your credit score goes up and down over time. There are a number of factors that can influence your score, including your credit utilization ratio, payment history, and credit mix.
One factor that can impact your score is a credit limit increase. When you receive an increase to your credit limit, it can lower your credit utilization ratio, which is the percentage of your available credit that you’re using. A lower credit utilization ratio can lead to a higher credit score.
In addition, a credit limit increase can also help to improve your payment history. If you’re using a larger portion of your available credit, you’re more likely to make on-time payments and avoid missed or late payments. This can also lead to a higher credit score.
If you’re thinking about requesting a credit limit increase, there are a few things to keep in mind. First, make sure that you have a good payment history with the issuer. If you’ve been making late or missing payments, it’s unlikely that they’ll approve an increase. Second, remember that an increase in your credit limit will result in an increased debt-to-credit ratio on your report. If you’re close to maxing out your current limits, an increase could push you over the edge and negatively impact your score. Finally, keep in mind that a highercredit limit could tempt you to spend more than you can afford to pay back. If you’re not careful, this could lead to financial trouble down the road.
Why Your Credit Score Might Go Down
Your credit score is based on your credit report, which is a record of your credit activity. If you have a lot of debt, your credit score will go down. If you make your payments on time, your credit score will go up.
You’ve missed a payment
If you have missed a payment on any of your bills, your credit score will go down. This is because creditors view missed payments as a sign that you’re not able to manage your finances responsibly. To avoid this, be sure to always make at least the minimum payment on time.
You’ve maxed out a credit card
If your revolving credit utilization (i.e. the amount of debt you have relative to your credit limit) spikes up, even for one month, your credit score will likely drop.
This is because when you max out a credit card, it signals to lenders that you might be struggling to keep up with your debt payments. And since one of the main factors that determines your credit score is your payment history, this can cause your score to dip.
To avoid this, make sure you keep your revolving credit utilization below 30% (ideally below 10%). This means that if you have a $1,000 credit limit, you should keep your balance below $300.
You’ve closed a credit card
One common reason your credit score might drop is if you’ve recently closed a credit card. While it might seem like the logical thing to do — particularly if you’re trying to get out of debt — closing a credit card can actually backfire and cause your score to drop.
When you close a credit card, you lose the positive history associated with that account — including any on-time payments and length of credit history. This can cause your score to drop, particularly if it’s a card you’ve had for a long time.
If you’re trying to improve your credit score, it’s usually better to keep old accounts open even if you’re not using them. This will help offset any negative impact from closing an account.
How to Check Your Credit Score
Checking your credit score is a good way to see how you’re doing financially. It can also help you spot any errors on your credit report. Your credit score may go up or down depending on your financial activity.
Use a credit monitoring service
It’s a good idea to use a credit monitoring service to keep track of your credit score. Credit monitoring services will give you an idea of where your score stands, and they can help you identify any potential red flags. There are a few different credit monitoring services available, and they all have different features.
Some credit monitoring services will send you alerts if there is any activity on your account, and others will give you access to your credit report. Some credit monitoring services are free, while others come with a monthly fee. Choose the credit monitoring service that best suits your needs.
Check your credit score for free with a credit card
Your credit score is important because it’s a factor in the decision that lenders will make when considering whether or not to give you a loan. A higher score means you’re more likely to get approved for a loan with a lower interest rate. A lower score means you’re more likely to get rejected for a loan or be offered one with a higher interest rate.
There are many ways to check your credit score, but one of the easiest and most affordable ways is to use a credit card. Most major credit card issuers offer free online access to your credit score, usually on your statement or in your online account. Simply log in and look for the section titled “Credit Score” or “FICO Score.”
If you don’t have a credit card, there are other ways to check your score for free. You can get your credit report from AnnualCreditReport.com, which is the only website that is authorized by the federal government to provide free credit reports. You can also use CreditKarma.com or Quizzle.com, which offer free credit scores and reports from two of the three major credit bureaus (Experian and TransUnion).
How to Improve Your Credit Score
Your credit score is always changing.
Make all your payments on time
One of the single biggest factors that influences your credit score is whether you pay your bills on time. That’s why one of the best things you can do for your credit is to make all your payments on time, every time.
No one’s perfect, so if you do miss a payment, don’t panic. Just make sure you get back on track as soon as possible and make all your payments on time going forward. The sooner you can show creditors that you’re back on track, the better.
Remember, even if you have a history of making late payments, you can still turn things around by making all your payments on time from now on. Consistency is key when it comes to improving your credit score.
Keep your credit card balances low
Credit scores range from 300-850. Anything above 650 is considered a good credit score while anything below 550 is poor. If you’re not sure where your credit score falls, you can check for free using a site like Credit Karma.
One way to improve your credit score is by keeping your credit card balances low. This shows creditors that you’re using a smaller portion of your available credit, which looks good on your credit report. Creditors usually report to the credit bureaus once a month, so if you keep your balances low throughout the month, you’ll likely see an uptick in your score at the end of the month.
Get a credit limit increase
One way to improve your credit score is by asking your credit card company for a credit limit increase. If you have a good history with the company and make timely payments, they may be willing to increase your limit, which will in turn increase your credit score. Just be sure to not overextend yourself by spending more than you can afford to pay back.