Credit scores are influential numbers because they usually determine the interest rates assigned to a consumer and whether someone can get a loan. They gauge a consumer’s paying habits and the likelihood they will pay off a loan.
And sometimes, they can drive you to distraction because of unpredictability.
Credit score fluctuation can be like the weather, changing from day-to-day or month-to-month, creating great alarm if there is a dramatic rise or fall. The roller-coaster ride with credit scores can leave you wondering why it happened and what was the cause, especially if it drops.
First, know that it isn’t fixed or a static measurement. Think of it as a moving target. It is calculated based on the most recent and up-to-date credit information available. It could change every day because lenders, collection agencies and public records are reporting new data.
Even the passage of time could cause your credit score to fluctuate. Some information in your credit report becomes less significant as time passes. When negative information falls off your credit report, your credit score could change quickly (and seemingly arbitrarily).
Credit Scoring Differs at Major Credit Bureaus
The basic story is this: There are four major companies involved in credit scoring (FICO, Experian, TransUnion and Equifax). Each company has its own algorithm for sorting through data. They also have different timing schedules for when that data is entered.
“It really is not mysterious at all,’’ said Rod Griffin, director of public education for Experian. “Your creditors update about once a month. Now that can vary across the month. They don’t all update on the same day at the same time.
“The credit scores reflect the information in the credit report at that moment in time, when it’s requested. If you request a report right now, it could be a different score if you request it 15 minutes from now or tomorrow, when one of your lenders send an update. That’s really as hard as it gets.’’
The credit reporting companies don’t always agree, of course. The scoring can be close, but seldom is it ever the same.
Trying to pinpoint why scores fluctuate can be tricky because each company closely guards its operational methods and how each bit of data factors into the final result.
On Time Payments Biggest Scoring Factor
Can Arkali, FICO’s principal scientist for analytics and scores, said the data has been relatively flat in recent years. In April 2017, the national average FICO score was 700 (from a random sampling of two-million consumers). Two years earlier, in April 2015, it was 695.
Alkali said his research indicated that some FICO scores could be dramatically improved — anywhere from 20 to 100 points over a 12-month period — by employing responsible financial behavior.
“If you have someone who has a history of missing payments, someone with poor experience in handling credit, if they start making consistent full payments over a year’s time, it can have a significantly meaningful and positive impact on their FICO score,’’ Arkali said. “On the other hand, if this occurs with someone who had no missed payments or obligations in the past, it’s unlikely to have a meaningful impact on their FICO score.
“You may also have a circumstance where the consumer starts going delinquent (with payments) and that will certainly have an impact. It’s more noticeable on someone with a higher starting FICO score because they have a bit more to lose, so to speak. If you’re in a circumstance where you miss payments, the No. 1 remedy is to get back on track and stay on track. Keep it as an isolated incident. The negative information that has an impact on the FICO score, it subsides over time.’’
‘Scoreboard Hopping’ a FICO Factor
FICO uses something called “scorecard hopping,’’ which pools people with similar risks. If you are consistently late with payments, you might be placed on a scorecard with other late payers. By changing your habits and paying off bills every month, FICO could move you to a different scoreboard with a different pool of payers.
FICO doesn’t provide information on how it assigns consumers to scorecards, but hopping to a new scorecard probably means a credit score change. The exact method, though, falls under FICO’s trade secrets.
Here’s something that isn’t a secret:
The fastest way to a great credit score is to pay all your bills, on time, every month. Period. Do that over a few years and you’re practically guaranteed a great credit score.
In theory, that sounds great. But most people are challenged to pay every bill, every month. Let’s say there are a lot of birthday presents to purchase one month or you overspend during the holidays. Your credit card use will go up. If that’s the case, your credit score might go down.
It’s the same with late mortgage payments, auto loans or any other installment loans that come due on a regular basis.
But when you find that elusive financial sweet spot — perhaps skipping trips to the mall, eating all your meals at home, passing on week-long vacations at the beach, while paying off credit-card debt, student loans or other regular bills — your credit score should jump.
How to Build a Good Credit Score
For consumers who like predictability, there are some tried-and-true methods to having a solid, stable credit score:
- Pay on Time — Nothing impacts your credit score more dramatically than late payments. Nothing! They have an immediate negative effect, but also stay on your report for up to seven years. Why is my credit score going down when I pay on time? If that’s the question, there could be other factors to consider.
- Use Less than 30% of Available Credit — If you have a $1,000 limit on your credit card, don’t charge more than $300 a month on it. In fact, $200 is better. The more room you leave available, the higher your credit score.
- Limit Yourself to Three Credit Cards — With fewer cards, it’s easier to track spending. It also reduces the temptation to max out a few cards. Sure, it’s always good to have an extra card around to handle an unexpected emergency, such as car repairs. Be sure to rotate the cards, so each one shows action. But always be sure to pay them all off at the end of every month.
- Only Apply for Credit When Necessary — Use credit only when you need it and can afford it. We know you’re probably flooded with credit card and auto loan applications, but toss them immediately. No need to jeopardize your credit score, which is hugely influenced by missed payments of any kind. If you limit your available credit, you also limit your opportunity to miss a payment.
Five Factors in Calculating a Credit Score
There is a standard formula for the factors utilized in calculating your credit score.
- Payment history — 35%.
- Level of debt — 30%.
- Age of credit history — 15%.
- Mix of accounts — 10%.
- Recent inquiries — 10%.
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 don’t 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.
It’s normal to expect fluctuation within and between agencies. But it’s always a good idea to pull your credit report and make sure the information is accurate. Small fluctuations aren’t worth the worry. If you’re practicing creditworthy behavior, your score will improve over time, even if it takes a few dips along the way.
Why Does My Credit Score Fluctuate So Much?
Ah, the million-dollar question. While we can’t provide the definitive answer, we can identify some general areas that cause fluctuation in a credit score.
Public Records — Legal documents involving bankruptcy, tax liens or court judgments that are recorded by the government are available to the public and used by the credit reporting bureaus. The report is almost always negative, even if the debt has been paid off. It is best to avoid bankruptcy, tax liens or court judgments because those public records stay on your credit report for at least seven years. To protect your credit score, it’s always best to negotiate a settlement rather than to allow a debt to become a public record.
Hard Inquiries — These occur when you apply for a credit card, auto loan, mortgage or some other type of credit. They have an adverse impact on your credit score because an inquiry generally means you expect to be taking on new debt such as a home, car or loan to help overcome a financial setback. On the other side are soft inquiries such as consumers asking for their credit score or credit history, an employer or landlord seeking a credit report and credit-card companies screening applicants for pre-approved cards, which have no effect on your credit score.
Payment History — This makes sense because it’s the largest factor used to calculate your credit score. New payment behavior is a common cause for credit-score fluctuation. Additionally, when making payments on an installment loan, mortgage or auto loan, you are decreasing the amount of overall debt. That could also cause an increase in your credit score.
Debt-To-Credit Ratio — This reflects how much of your available credit you are using. It could cause credit-score fluctuations, especially if your credit card balances change from month to month. However, it varies, most experts agree that you should avoid carrying a balance of more than 30% of your credit limit in order to be viewed favorably by lenders.
Changes in Revolving Credit — If your interest rate increases, your debt could climb higher and that will be reflected on your credit report.
Changes in FICO Formula — For better or worse, any changes in the FICO formula calculations could be reflected in your credit score going up or down.
Applying for New Credit — Seeking a new credit card or applying for a mortgage or auto loan will be duly noted.
Algorithms and Report Refreshes
Here are two factors that could influence your credit score. What are algorithms and report refreshes?
Algorithms are mathematical procedures or the set of rules in a computer program that credit bureaus use to determine a credit score.
Report refreshes, sometimes referred to as “refresh cycles’’, occur when there’s a change in the data fed into the algorithms.
When the credit scoring industry (FICO, Experian, Equinox and TransUnion) occasionally tweaks the algorithms used to determine your credit score, more weight is given to certain aspects of your credit history and less weight to other factors.
A major tweak occurred in the summer of 2014, when FICO instituted a new algorithm (FICO 9) that gave less weight to unpaid medical bills for six months after the bill was issued. The new algorithm also removed negative reports for debts with collection agencies that had been paid or settled.
More than 64 million Americans had medical collection debt on their credit report, so this was a big deal. The new algorithm was expected to raise credit scores by as much as 20-25 points.
Report refreshers happen almost every monthly billing cycle. They can be simple (such as a change of personal information like an address or making an on-time auto loan payment) or very involved (such as settling a long overdue debt with a collection agency).
When making a major purchase, such as a home or car, you should know your credit score, obviously. But it also makes sense to utilize the “rapid rescoring’’ option that could lead to a better deal on the loan.
Under rapid rescoring, consumers on the borderline between good and excellent or fair and good, can improve their credit score in a short window (3-4 days) to take advantage of a better interest rate on a loan. Normally, it requires 3-4 months to effect such a change.
Why is this important? Interest rates are tied to levels on the credit scoring totem pole. If your score varies by a few points — up or down — it could make a big difference in what you end up paying for a loan.
Example: A lender could offer a 30-year mortgage at 4% for consumers with credit scores above 740. If you are at 739 (or lower), you might have to pay 4.25%. That’s a difference of more than $11,000 on a 30-year, $200,000 loan.
If your lender allows you to use rapid rescoring, you could get your score above 740 and get the better interest rate. How does it work? You must document mistakes that appear on your credit report, pay down credit-card balances or other installment loans and ask the lender to submit the information to its credit bureau.
If you have verifiable proof that your credit report includes inaccurate information — or if you have made significant progress in reducing credit balances — your credit score could improve enough to get you a better interest rate.
Of course, the process works much more efficiently if you obtain a credit report and check your score 6-8 months before asking for a loan. Failing that, ask your lender about rapid rescoring.
When to Worry about Credit Score Fluctuations
Credit score fluctuations are normal. They routinely adjust each month. But if there are major drops in your credit score (let’s say 25 points in a month or two), it’s best to investigate.
Inaccurate Reported Information — Here’s the biggest reason why it’s important to check your credit report each year. Accidents happen, but they can also create lingering problems that are avoidable.
Fraudulent Accounts/Accounts You Did Not Open — Identity theft is a major issue these days. This can explain why your credit score has mysteriously dropped.
Late or Missed Payments — Payment history is major influence on your credit score. Falling behind on a big bill payment (by 30 days or more) will cause you score to take a big hit. Best advice? Stay as current as you can. A 30-day delinquency isn’t good. But a 60-day (or 90-day) delinquency is worse. It helps to get back in good standing as quickly as possible.
Drop in Available Credit — Your credit utilization ratio (how much you owe compared to your credit limit) is a major influence on your credit score. More credit-card debt will worsen your utilization ratio and that will drop your score. If you happen to pay off your credit-card debt, by the way, your credit utilization ratio will plunge and your credit score could rise just as quickly.
Beware of Credit Card Scams
Here’s a word of caution for anyone who is investigating their credit score. Email scam artists are taking advantage of the thirst for credit scores — simply by putting the word “free’’ in front of credit scores. When consumers click on the “free’’ links or attachments, they learn they have been phished (a technology-spawned word that indicates someone is about to steal your personal or financial information).
The so-called phishers use malware to access your computer and retrieve information about your name, address, social security number and account information. They engage in identity theft — and straight-up theft from bank accounts.
According to the Better Business Bureau (BBB), scam artists design websites of URL addresses that closely resemble legitimate business sites. The BBB advises against clicking on emails from unfamiliar companies, especially if it includes an invitation to “contact us.’’
Many legitimate firms, including most of the credit-card companies, offer a “free’’ credit score. For any others, you should validate the URL address, while not giving out your social security number or credit-card information.