Whats In Your Credit Score
The credit score offered by Discover to its cardholders is the most widely used credit score, the FICO score. Here are the components FICO says go into that credit score:
- Payment history: 35 percent. Simply whether youve paid your bills on time.
- Level of debt: 30 percent. How much debt you have, how much youve borrowed relative to your limits, and a few other factors.
- Length of credit history: 15 percent. How long your accounts have been established
- Types of credit: 10 percent. The mix of credit you have, including revolving accounts, installment loans, mortgage loans, etc.
- Recent inquiries: 10 percent. Opening several accounts, which require inquiries, within a short period of time can lower your score.
Keep in mind that your credit score is based on your credit history, so anytime something changes in your history, your score can change as well. Youre entitled to one free credit report annually from each of the big three credit reporting agencies by visiting AnnualCreditReport.com.
Check Your Credit Score For Free
Knowing where you stand and watching your progress can be important. With Experian, you can check your FICO® Score for free. Your account gives you a breakdown of which factors are impacting your score the most, so you can take a focused approach to improving your score. Your credit score will also automatically be tracked and updated each month.
Missed Or Late Payment
Your payment history has an impact in the VantageScore® 3.0 model. Making a late payment or missing a payment on any of your credit accounts, be it a credit card, student loan or mortgage, can be a detriment to your credit score not to mention the fees you’ll endure. Your credit score represents your creditworthiness, or your ability to repay your debt. Missing a payment or making a late payment indicates that you may not be financially responsible.
The best way to avoid making late or missed payments is to set up autopay.
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Age Of Accounts In Your Credit History
As your credit file and accounts age, your score can improve. FICO looks not only at your oldest account, but also at the average age of your accounts. While this factor may not have a significant affect in any given month, it can cause scores to increase when accounts cross an age threshold that FICO finds significiant.
If Your Score Isn’t Increasing It Could Actually Be Costing You Money
How? Your credit score directly affects the interest rates youre eligible for. Yet another perk of having great credit, is that when you apply for a credit card, youll be offered a much better interest rate than someone with poor credit. This can have a huge impact on your financial stability, lowering your overall cost of borrowing significantly.
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Reasons Why Credit Scores Drop
Credit scores are calculated using lots of information from your credit report about your finances. This includes factors like your payment history, the amount you currently owe, your and how many accounts you have open. So when thereâs a drop in your score, itâs likely that thereâs been a change in one of these or one of the many other factors that go into credit scores.
Read on for some reasons your credit score might drop and what you can do about them.
1. New Credit Applications
A new credit application could have an impact on your credit score. Thatâs because a new credit application creates a âhard inquiry,â which can stay on your credit report for up to two years. And multiple credit applications in a short period of time may raise a red flag to lenders. Those applications could be seen as a sign your financial situation has changed, and it could put a dent in your score.
What you can do: Try to keep new credit applications to a minimum by only applying for the credit you need. And when you do apply for a new credit card, you could first check with the lender to see if they can tell you whether you may be pre-qualified or pre-approved for one of their cards. Pre-qualification and pre-approval use whatâs known as a âsoft inquiryâ to check your credit, which wonât hurt your score.
2. High Credit Utilization
3. Payment History
4. Derogatory Remarks on Your Credit Report
Identity Theft Or A Mixed Credit File Is Dragging You Down
A much lower score than you expected might mean that someone elses credit activity is being reported as yours. This could be because a criminal is using your credit card number or opening new accounts in your name.
It could also happen if you have the same name as someone else and your credit files have become mixed with theirs. Both should be disputed with the credit bureaus.
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How Long Does It Take To Rebuild A Credit Score
There’s no set timeline for rebuilding your credit. How long it takes to increase your credit scores depends on what’s hurting your credit and the steps you’re taking to rebuild it.
For instance, if your score takes a hit after a single missed payment, it might not take too long to rebuild it by bringing your account current and continuing to make on-time payments. However, if you miss payments on multiple accounts and you fall over 90 days behind before catching up, it will likely take longer to recover. This effect can be even more exaggerated if your late payments result in repossession or foreclosure.
In either case, the impact of negative marks will diminish over time. Most negative marks will also fall off your credit reports after seven years and stop impacting your scores at that point if not sooner. Chapter 7 bankruptcies can stay for up to 10 years, however.
In addition to letting time help you rebuild your scores, you can follow the steps above to proactively add positive information to your credit reports.
Why Did My Credit Score Drop After Paying Debt
There are several factors that make up your credit score, and paying off debt does not positively affect all of them. Paying off debt may lower your credit score if it changes your credit mix, or average account age. Here are some scenarios that could negatively affect your credit score:
- You eliminated your only installment loan or revolving debt: Creditors like to see that youre able to manage various types of debt. And if eliminating a particular debt makes your credit report less diverse, it can negatively affect your score. For example, if you pay off an auto loan and are left with only credit cards, your credit mix suffers.
- Youve increased your overall credit utilization: Keeping the overall utilization of your available credit low results in a better score. But when you pay off a revolving line of credit or credit card in its entirety and close the account or let the account go inactive , it decreases the total amount of credit you have available, potentially increasing your remaining utilization rate.
- Youve lowered the average age of your accounts: The longer your accounts have been open and in good standing, the better. Having a 20-year old account on your report is a good sign, even if you dont use it closing that account and being left with accounts no more than five years old dramatically reduces the average age of your accounts.
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Why Did My Credit Score Go Up
Due to the amount of information thats used to calculate your credit score, its easy to see how your score can fluctuate.
Heres why you might see a bump upwards in your score:
- A negative listing is expired or old. Information is only held on your credit report for a certain length of time, so when a negative listing is removed from your credit report, your credit score should increase.
- You changed your credit limit. Requesting or receiving an increased limit on your credit card can positively impact your credit score because you have more available credit at your fingertips. However, you might see an initial drop because of the request, but if approved your score will typically shoot back up. Credit increase requests should be limited to every two to three years.
- Older accounts. The longer youve had a credit account, the better your score will be because the length of your credit history is always aging. The amount of time youve had your credit accounts open for represents about 15% of your credit score.
- Diversifying your credit. When you responsibly manage different types of accounts home loan, personal loan and credit cards it broadens the financial diversity of your credit history and may improve your score.
- Managing your credit. By making on time payments, paying your due balance in full each month and not irresponsibly using your credit, youll likely see your credit score go up but be patient, it takes time.
Why Did My Credit Score Drop After Paying Off Debt
Your credit score is a reflection of how well you manage debt, so it seems like paying off a large balance should automatically improve your score. Unfortunately, this may not always be the case, at least not in the short term. If you’re wondering why your credit score goes down when you pay off debt, you have to dig a little deeper to fully understand all of the factors that impact your credit score.
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You Recently Took Out A New Line Of Credit
You mightve seen a drop in your credit score if youve recently been accepted for any new lines of credit. The amount your score actually drops will depend on how large the loan is and your overall credit history, but its one of the most common reasons peoples scores go down, according to Griffin.
It may not make sense at first glance: You had a good enough score to secure a low-interest mortgage loan, so why would it suddenly drop down now that you have it? But from a creditors perspective, Griffin says that while you may have good credit history, they have no idea whether or not youll continue to make the required payments long-term.
The good news is that if your credit score has taken a dip after being approved for a new loan, once you consistently make payments over the next few months, it will likely rebound or even grow as you build a longer credit history.
One piece of common knowledge about building credit is that your score tends to take a hit whenever a hard credit check is run on you, usually when applying for a new line of credit or apartment. But according to Griffin, a credit inquiry alone is unlikely to have a major impact on your overall score maybe 10 points at maximum.
You might see your scores dip a bit initially, but inquiries are really the least important factor in credit scores and will have the least impact, he says.
Should You Worry About Changes In Your Credit Score
Changes in your credit score are completely normal, so theres no need to worry about small fluctuations! That being said, its good to check your credit report at least once a month so you can monitor these changes when they occur.
You may want to take note of large changes in your score as they could be an indication that something bigger is happening for example, if you have unauthorized accounts opened in your name, or youve been a victim of identity theft.
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A Hard Inquiry Fell Off Your Credit Report
When you apply for a loan, line of credit or credit card, a lender or credit card issuer will pull your credit report to check your payment history, other debt obligations and experience managing credit.
This is called a hard inquiry, and a record of the credit check will make its way onto your credit report. That happens so that credit scoring models, as well as other lenders and credit card issuers, can see how often you’ve applied for credit in the past. If you have many applications to a variety of credit types, you may appear to be a bigger lending risk. Credit scoring models do recognize the importance of rate shopping for loans like mortgages and auto loans, however, and will count similar loan applications as one inquiry if they’re submitted over a period of a couple weeks.
Hard credit inquiries stay on your credit report for up to two years. In most cases, they’ll only negatively affect your credit for a year or less. A single inquiry’s effect on your credit will be slight, if it’s noticeable at all, and can be blunted by positive payment history and other responsible credit behavior. If your score increased recently, it might be because an old hard inquiry is no longer being factored into your score.
Ways To Improve Your Credit Scores
If you’re looking to improve your credit scores, these tips can help.
- Pay your bills on time. This is one of the most crucial steps to getting and keeping a good credit score. The best way to pay on time is to set up automatic payments so you won’t miss a bill. But make sure you have enough money in the connected bank account to avoid an overdraft.
- Minimize overall debt. If possible, don’t lean on credit to buy items you’re not able to pay for in cash, or that you can’t pay off by the end of the month. This keeps your payments manageable and your ongoing credit utilization ratio low. Your goal should be to bring your credit card balance to $0 at month’s end.
- Monitor your credit regularly. There are many ways to check your credit score for free, including via Experian. Doing so can help you identify dips in your score quickly and course-correct if necessary. Free credit monitoring from Experian can help you keep tabs on both your FICO® Score and credit report, and keep you updated when there are any changes to your credit report.
- Avoid applying for unnecessary credit cards. Not only do some cards have pricey annual fees, but an abundance of cards might result in more spending than you can handle.
- Practice responsible spending habits. Setting up a budgeteven a general one that categorizes your spending into a few overall buckets and doesn’t require too much upkeepcan help you spend within your means over the long term.
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Build Your Credit File
Opening new accounts that will be reported to the major credit bureausmost major lenders and card issuers report to all threeis an important first step in building your credit file. You can’t start laying down a good track record as a borrower until there are accounts in your name, so having at least several open and active credit accounts can be helpful.
These could include or secured cards if you’re starting out or have a low scoreor a great rewards credit card with no annual fee if you’re trying to improve an established good score. Getting added as an on someone else’s credit card can also help, assuming they use the card responsibly.
Additionally, you can sign up for Experian Boost to add positive utility, cellphone and streaming service payments to your Experian credit report. These on-time payments wouldn’t otherwise be added to your credit report, but using Boost means they’ll be factored into your Experian credit scores.
Fluctuation Between Credit Reporting Agencies
You could find that you have three different credit scores between the three major credit reporting agencies: Experian, Equifax, TransUnion. Do credit scores change daily? Sometimes.
And the obvious follow up would be: Why?
There are numerous factors in calculating credit scores and some are ever-changing. Some creditors dont report their information to all three of the agencies, so each agency could have a slightly different set of data from which to calculate your credit score. Even if the data is consistent among the three agencies, each one uses a different scoring model and that along could generate different scores.
Different scoring from lenders also figures into the equation. Some lenders use industry-weight scores basically, a mortgage lender probably uses a different scoring model than an auto lender whose scoring model differs from a credit card company while others use blended scores from all three agencies.
Its normal to expect fluctuation within and between agencies. But its always a good idea to pull your credit report and make sure the information is accurate. Small fluctuations arent worth the worry. If youre practicing creditworthy behavior, your score will improve over time, even if it takes a few dips along the way.
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Its Never A Good Feeling To See That Your Credit Scores Have Dropped Since You Last Checked But Being Able To Quickly Identify The Cause Can Help You Take The Right Steps To Get Them Back On Track
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts , or applying for new credit accounts. And dont forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Lets look at the nine main reasons why your credit scores might have dropped, and how you can address each of them.