Why Does My Credit Score Go Up and Down?
Discover why your credit score constantly changes. Understand how your financial activity influences its fluctuations, impacting your financial health.
A credit score serves as a numerical representation of an individual’s creditworthiness, indicating the likelihood of repaying loans and managing payments promptly. These scores are typically three-digit numbers, ranging from 300 to 850, and are derived from information within a person’s credit history. Lenders utilize these scores to assess the potential risk associated with extending credit, influencing decisions on loan approvals, interest rates, and credit limits. Factors such as active accounts, total debt levels, and repayment history contribute to this assessment.
Credit scores are not static figures; they are dynamic, constantly adjusting based on various financial activities. This fluctuation reflects changes in an individual’s financial behavior and credit management over time. Understanding these movements can help individuals navigate their financial health.
Changes in Credit Utilization
Credit utilization, often expressed as a ratio, measures the amount of revolving credit currently in use compared to the total available revolving credit. This ratio significantly influences credit scores, with lower utilization correlating with higher scores. Maintaining this ratio below 30% is advised, though lower percentages, such as under 10%, are more favorable.
Fluctuations in this ratio directly impact a credit score. For example, increasing spending on credit cards without a corresponding increase in credit limits will raise the utilization ratio, leading to a score decrease. Conversely, paying down credit card balances reduces the amount owed, thereby lowering the utilization ratio and boosting the credit score.
Credit limit adjustments impact this ratio. If a creditor increases a credit limit and the cardholder’s balance remains the same, the utilization ratio will decrease, improving the score. If a credit limit is reduced, the same outstanding balance will result in a higher utilization ratio, causing a score drop. Actively managing credit card balances and being aware of credit limit changes are important for maintaining a healthy credit score.
The Role of Payment History
Payment history is a primary determinant in credit score calculations, accounting for 35% of a FICO Score. Consistent, on-time payments demonstrate reliable financial behavior and contribute positively to a rising credit score. Timely payments reinforce a positive credit profile, signaling dependability to lenders.
Conversely, late or missed payments diminish a credit score. Creditors report payments as late to credit bureaus once they are 30 days past the due date. The severity of the score drop increases with the length of the delinquency; a 90-day late payment impacts a score more than a 30-day late payment.
Even a single late payment can have a negative effect, especially for individuals with a strong credit history. While a late payment remains on a credit report for up to seven years from the original delinquency date, its impact on the credit score lessens over time. Consistent timely payments after a delinquency are necessary to rebuild a positive credit standing.
Effects of New Credit Applications
Applying for new credit initiates a “hard inquiry” on a credit report. This occurs when a lender requests to review a credit file for a new loan or credit card. A hard inquiry causes a temporary dip in a credit score, typically by less than five points.
Hard inquiries remain on a credit report for up to two years, but their impact on credit scores lasts for about 12 months. Multiple inquiries for the same type of loan, such as a mortgage or auto loan, within 14 to 45 days are treated as a single inquiry by scoring models. This allows consumers to shop for rates without incurring multiple score penalties.
Opening new accounts affects the average age of all credit accounts. Since the length of credit history is a factor in credit scoring, a new account lowers this average, causing a temporary score dip. Over time, a diversified credit mix and responsible management of new accounts benefits a credit profile.
Significant Negative Financial Events
Negative financial events cause significant, prolonged decreases in a credit score. These events, such as bankruptcies, foreclosures, repossessions, collections, and charge-offs, indicate an inability to meet financial obligations. Such entries remain on credit reports for several years, impacting future credit opportunities.
A Chapter 7 bankruptcy, which liquidates most unsecured debt, stays on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, involving a repayment plan, remains for seven years. Foreclosures stay on credit reports for seven years from the date of the first missed payment that led to the action.
Collections and charge-offs, which occur when a debt is past due and uncollectible, stay on credit reports for seven years from the original delinquency date. While the impact of these items on a score lessens over time, their presence hinders access to new credit.