Understanding credit scores isn’t easy, especially if you have no experience with the credit system or you’re just starting out. We all know we need credit, but how do those magic numbers actually work? And if your credit score suddenly sinks by a few points, is that really so terrible? Could it mean you’ve messed up for good? We’ll answer these and other credit questions right here in this post.
Credit scores can change for many reasons. Whether your score moves up or down really depends on a long list of often-mysterious-sounding factors. The good thing is that credit scores are fluid, and that means no matter where they go, you ALWAYS have the ability to improve. Learn how credit bureaus even calculate those crazy scores and how to determine when you really have a problem in this guide.
Why Wait? Understand Your Credit Score Fluctuations Today!
How Do Credit Scores Work?
Your credit score is configured by a formula which looks at open accounts, paid accounts, late payments, inquiries, collections, available and used credit and closed accounts. Even the amount of credit or debt you hold compared to your income plays a role in the calculation.
Each credit reporting agency uses their own formula (which is why they often differ slightly) but all have the same “big idea”: open accounts with timely payments, available credit, and paid accounts have a positive influence on score. Failing to make payments, skipping town on bills, or having accounts closed for non-payment? All bad news, but it’s really much more complicated than that.
Has Your Score Gone Down?
If you’re making all your payments on time, you would expect your credit score to go up right? Well that depends. If you’re at the top of your credit limit, have several high dollar credit accounts, and have been trying to get a new credit account, all of those things will work against you.
The average American scores between 600 and 750 with “good” credit; scores below 600 need some work. And anything under 500? That’s the “danger zone,” so to speak. Having a score that low might mean you’re refused credit or are forced to suffer with harsh interest rates because lenders consider you high-risk.
But having a low score isn’t the end of the world. Everyone makes mistakes. It may be as simple as catching up on a few late payments or paying off a collection to nudge you from “eh” credit to “Yay!”
Has Your Score Gone Up?
Good job! That means you’re making the right strides and being responsible with your money (generally, anyway). A higher credit score is generally a good thing, and a score between 750 and 800 is considered “excellent” credit.
The Big Takeaway
The most important thing you need to know is that credit scores fluctuate – that is one of the best things about credit. Your score may be iffy now, but in 3 weeks, it could be higher if you pay off an old debt or even if you’re approved for new credit for the first time in several years.
(Just remember that the opposite is also true; you can’t just keep opening accounts because it makes you look like you’re desperate for credit. Timing is everything.)
What you should do is get to know your own credit score, learn more about how to use credit efficiently, and learn how to make the most of your money.
How to Monitor Your Credit
You can monitor your credit for free – either through bureaus like TransUnion and Equifax or through websites like Credit Karma. Although hard inquiries (when creditors pull your credit to see if they can approve you) can knock your score down a point or two, these softer inquiries don’t affect your credit at all. Best of all, it’s free to monitor as often as you like. Check them, and monitor your progress over time.
As for whether those little shifts in your score really matter? Yes and no – it depends on how often and how much your score shifts. A slow, steady climb is really more influential than, say, dropping 50 points and regaining it again just a few months later. Focus on the long-term and avoid debt and your score WILL improve.
~Here’s to Your Success!