Why Did My Credit Score Change? The Secretive World Of Credit Scores
Sometimes, it seems you’re doing everything right, and your credit score goes down! It’s maddening! Why did my credit score drop after paying off debt? Why is my credit score going down when I pay on time? Why did my credit score drop after getting a credit card? And perhaps most confounding, why did my credit score go down when nothing changed?
We’ll answer these questions and explain what you can do to make your credit score go up.
Credit scores are a mysterious thing
If you monitor your credit score (you should), you’ll see frequent changes that make you wonder why did my credit score change and is it ever possible to reach the top credit score of 850.
Your credit score is based on your credit history or credit report, data compiled by credit bureaus; the three main ones are Experian, Equifax, and TransUnion. The formula used to calculate that data into a number is proprietary. Each bureau has its own formula.
When lenders report your information to the credit bureaus, your credit score can change. When the information is reported and to which bureau (one, two, all three) can cause fluctuations to your credit score monthly, weekly, daily, and even multiple times per day.
What your credit score is also depends on where you’re viewing it. Mint, for example, uses Equifax scores, Credit Sesame uses Experian, and Credit Karma uses TransUnion. Mint might show your score as 725, Credit Sesame as 730, and Credit Karma as 733. They aren’t the same, but they should all be generally in the same range. If one is much different from the others, it could signify that one of the bureaus has incorrect information on your report, something you can and should correct.
Explaining a sudden drop in credit score
You just paid off a credit card and closed the account. You expect to see your credit score improve since you now have less debt. But it doesn’t improve. Your score dropped. What’s happening?
Your credit score is made up of the following:
Payment history 35%
Utilization 30%
Length of credit history 15%
New credit 10%
Types of credit 10%
When you pay off a credit card and close the account, it affects utilization, length of credit history, and possibly types of credit. Utilization is how much credit you’re using compared to how much you have. When you close a credit card, you reduce the amount of credit you have by whatever the spending limit on the card was.
Your length of credit history is how long you’ve had credit. The age of all of your accounts is added together and then divided by the number of accounts. Closing an account negatively impacts this because the longer your credit history, the better. If the credit card was your only card, you now have one fewer type of credit. Credit cards are revolving credit, while loans are installment credit. You may see a drop after paying off a loan for the same reasons.
It’s best not to close paid-off credit cards. If you don’t want to use the card anymore, put one small, recurring charge on it like your Netflix account or gym membership and set it to autopay. If a card goes too long without activity, the issuer may close the account.
As you can see above, the most critical factor in your credit score is whether or not you pay your bills on time. Even one late payment can drop your score considerably. Utilization is a close second. If you’re paying all of your bills on time but have recently increased your utilization (the balances on your credit cards), your score will drop. This is why it’s so important to have an emergency fund, so you don’t have to rely on credit cards for unexpected expenses.
Opening a new credit card or taking out a new loan can drop your score because it reduces the length of your credit history and increases the number of new credit accounts in your name.
If your score changes and you’ve had no events that would impact any factors that make up your credit score, there may be incorrect information on your report. You can order a copy of your report, find any incorrect information, and dispute it.
What makes your credit score go up
Making all of your payments on time and keeping utilization at 30% or less (ideally paying balances off in full each month) are the best ways to improve your credit score. If you’re trying to build credit, opening a credit card and taking out a credit builder loan can help.
How often to check your credit score
Your credit score is like your weight, it can fluctuate often, and many factors can affect it! And just like your weight, it’s not productive to check it too often. Once a month is often enough to check your credit if you’re working to build or improve your score. Once your score is where you want it to be (760 or higher), checking it quarterly is enough. This lets you ensure there aren’t any significant changes that could signal a problem like inaccurate information on your credit report or fraudulent activity in your name.
If you want to build or improve your credit, Upwardli can help match you with the best financial providers for your goals.
