What’s Causing Your Credit Score Fluctuations?
Once you’ve started to check your credit score on a regular basis, you may notice that the score tends to fluctuate. If you were to pull your credit report once a month, you might see changes in your credit score — or even on a daily basis (although that’s not recommended). The simple explanation is that your score is changing based on real-time updates to your credit report. If you check your score right before you make a payment on a loan or credit card, and then check it afterward as well; you might see slight differences. A number of factors could be at play, depending on your recent credit history.
Late Payments
The first thing you’ll want to consider is if you have had any missed or late payments recently, which tends to be the most significant reason that credit scores can fluctuate. Late payments remain on your credit report for seven years, even if you only missed the payment by a few days.
Changes in Credit Utilization Ratio
If you made a large purchase or paid off a substantial debt, your credit utilization ratio may change — which is part of the formula that the major credit bureaus use to determine your credit score. Your credit utilization ratio is calculated by dividing the amount of your debt on a credit card by your credit limit. For example, if you rack up $5,000 in spending on a credit card with a $7,500 limit, your credit utilization ratio will increase. On the other hand, if you made a large payment on a revolving credit card loan, that ratio would decrease, as you are now using less of your available credit.
Opening New Accounts
If you open a new account or take out a new loan, that typically shows up as a “hard inquiry” on your credit report, lowering your score. That is one reason why experts recommend not opening too many accounts at once. However, hard inquiries have less of an effect on your overall score than other factors.
Age of Accounts
As accounts grow older and cross certain thresholds, credit bureaus view them as less important in the overall calculation of your credit score. The bureaus consider the age of the oldest account, as well as the average age of all of your accounts. In addition, any credit “events” are deleted from your credit report once they pass the seven-year mark. So the fluctuations to your credit score could be the result of a negative event falling off your report or simply the passage of time lapsing since certain entries in your credit report.
Closing an Account
If you decide to close an account that you no longer use, that might cause your overall available credit to decrease, affecting your credit utilization ratio and therefore, your credit score. It’s typically recommended to keep old accounts open for that reason.
Changes to the Number of Loans or Accounts
To gauge your ability to pay debt responsibility, lenders want to see a diverse amount of open accounts and loans. Paying off a loan — even if it’s the largest one you have — will cause some changes to your credit score. Also, if you are opening a lot of accounts at once, your score may also take a hit as it may appear to lenders that you are struggling financially.
Word to the Wise
While regular credit report checks are a healthy part of credit management, you’ll want to resist the urge to check your score too frequently. And make sure you’re comparing apples to apples — your credit score can vary between the different scoring models, since each model uses its own specific formula. Fluctuations are normal over a daily or monthly basis, but it may take longer than that for your credit score to reflect your efforts to improve it. Keep in mind that slight changes over a brief period of time matter less than the overall picture.
It’s critical to check your credit report every so often to make sure the information being reported is both accurate and timely. Credit report errors are another common culprit of credit score fluctuations — and luckily, you can get them removed from your report.