Credit Score Fluctuations

Credit Score FluctuationsCredit scores are like weather temperatures. They fluctuate from day-to-day or even month-to-month and only cause alarm when there is a dramatic rise or fall. And sometimes, like a weather change, you have no idea a dramatic change was coming or what caused it.

The simplified reason is that there are four major companies involved in credit scoring – FICO, Experian, TransUnion and Equifax – and each of them has their own algorithms for sorting through date and timing schedules for when they enter that data.

Not surprisingly, they don’t always agree. They’re close, but seldom is the score the same.

There are other factors in score fluctuation that can be identified, but because each company keeps a lid on how it operates, there is no way to pinpoint exactly how each bit of data factors into the final result.

For example, there is something called scorecard hopping, a method FICO uses to pool people in a group with similar risks. You may have been consistently late with payments and placed on a scorecard with other late payers. At some point, you changed your habits and started paying off bills every month and FICO may have moved you to a different scorecard, or different pool of payers.

FICO doesn’t provide information on how they assign consumers to scorecards so you might have hopped to a scorecard with on-time payers or maybe one with part-time payers or some mix of both. Hopping to a new scoreboard probably means a credit score change, but it’s hard to predict which way. Those are trade secrets FICO keeps to itself.

For the most part, credit scores are a reflection of the consumer’s paying habits. The fastest way to a great credit score is to pay all your bills, on time, every month. Do that over a few years and you’re just about guaranteed a great credit score.

The problem for most people is paying every bill, every month.

If there are a lot of birthdays one month or you spend a lot on shopping during the holidays, credit card use may go up and your credit score goes down. If you fail to pay off credit cards when the bills come due, your score drops some more. Same with late mortgage payments, auto loans or any other installment loans you might have that come due on a regular basis.

On the other side, there will be months when you skip the trips to the malls, eat all your meals at home, pass on the week-long vacation at the beach and have no problem paying off credit card debt, student loans or any other regular bills you see. Your credit score should jump during those periods.

The easiest way to steer your credit score is to follow these rules:
  • Pay on time. Nothing impacts your score as hard as late payments. They not only have an immediate effect, they stay on your report for as much as seven years.
  • Use less than 30% of available credit. If you have a $1,000 limit on your credit card, don’t charge more than 300 dollars a month on it. In fact, 200 dollars is even better. The more room you leave available, the higher your credit score.
  • Limit yourself to three credit cards. Fewer cards make it easier to track spending and reduce the temptation to max out a few cards. It is always good to have an extra card around to handle an unexpected emergency like the car engine dying. Rotate the cards so each one shows action, but be sure to pay them all off at the end of every month.
  • Only apply for credit when necessary. Don’t fill out every credit card or auto loan application that comes along. Use credit when you need it and can afford it. Remember: missed payments of any kind are a huge blow to your credit score.

Public Records and Hard Inquiries

Public records and hard inquiries on your credit report both have an unfavorable impact on your credit score.

Public records are any legal documents involving bankruptcy, tax liens or court judgments that are decided by a court and recorded by the government. These documents are available to the public and are used by the credit reporting bureaus to determine your credit score. The effect is always negative, even if you paid them off.

Hard inquiries occur when you apply for a credit card, auto loan, mortgage or some other type of credit. It too has an adverse impact on your credit score because an inquiry generally means you are expected to be taking on new debt, such as a home, a car, or a loan to help overcome a financial setback.

On the other side are soft inquiries, which have no effect on your credit scored. Soft inquiries would include a consumer asking for his credit score or credit history; an employer or landlord seeking a credit report and card companies screening applicants for pre-approved cards.

If possible, it is best to avoid bankruptcy, tax liens or court judgments. These public records stay on your credit report for at least seven years. Tax liens can be there for 15 years. The impact lessens over the years, but still remains part of your report.

To protect your credit score, it is best to negotiate a settlement rather than allow a debt go into public record.

Algorithms And Report Refreshes

Algorithms and report refreshes could have as much impact on your credit score as on-time payment of credit card balances or long, overdue mortgage payments.

Algorithms are the mathematical procedure or set of rules in a computer program that credit bureaus use to determine a credit score. Report refreshes, sometimes referred to as refresh cycles, are those occasions when data fed into the algorithms changes.

Either one – change in algorithm or change in data fed into algorithm – can impact your credit score.

The major players in the credit scoring industry – FICO, Experian, Equifax and TransUnion – tweak the algorithms used to determine your credit score on an irregular basis. Each tweak gives more weight to one aspect of your credit history and less influence to another.

For example, FICO came out with a new algorithm in the summer of 2014 (FICO 9) that would give less weight to unpaid medical bills for six months after the bill was issued. The algorithm also removed negative reports for debts with collection agencies that had been paid or settled.

The new algorithm was expected to raise credit scores by as much as 20-25 points. More than 64 million Americans had medical collection debt on their credit report so a lot of consumers were affected.

Report refreshes happen almost every billing cycle, which is typically on a monthly basis. They can be as simple as a change of personal information like your address or making an on-time auto loan payment, or as involved as settling a long overdue debt with a collection agency.

The inevitable result of either an algorithm change ore report refresh is that your credit score will change … sometimes for the better, sometimes worse, though seldom dramatically.

Rapid Rescoring

If you know you are about to finance a major purchase like a home or car, it is wise to know your credit score well and even more sensible to be aware of the “rapid rescoring” option that could lead to a better loan deal.

Rapid rescoring is when a consumer is offered a chance to improve his credit score in a short window (usually 3-4 days) so that he can take advantage of a better interest rate on a loan. It normally takes 3-4 months to effect a change.

That’s important because interest rates are tied to levels on the credit scoring totem pole. A few points up-or-down can make a huge difference in what you end up paying for a loan.

For example, a lender might offer a 30-year mortgage at 4.00% to buyers with a credit score above 740. If you are at 739, or maybe just a few points below that, you may have to pay 4.25%. That is a difference of more than $11,000 on a 30-year, $200,000 loan.

If your lender allows you to use rapid rescoring, you might be able to get your score above 740 and get the better rate. To do so, you would need to 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 new score may improve enough to get you a better interest rate.

Of course, the process works much easier if you obtain a credit report and check your score 6-8 months before you ask for a loan. If not, ask your lender about rapid rescoring.

Email Credit Score Scams

The thirst for credit scores is growing so fast that email scam artists are able to take advantage of it simply by putting the word “free” in front of credit scores.

Unwitting consumers eagerly click on the “free” links or attachments and find out they’ve been phished, a technology-spawned word that means you are a victim and someone is about to steal your personal or financial information.

Phishers use malware to gain access to your computer and information about your name, address, social security number and account information. They use it for identity theft and straight-up theft from bank accounts.

The Better Business Bureau (BBB) sends out alerts on email scams and had a few credit-score related posts go out in 2014 and 2015. The BBB advised against clicking on any email from an unfamiliar company that included the invitation to “contact us.”

Most online users are aware never to click on links or attachments from unfamiliar senders, but the scam artists are getting cleverer. They design websites or URL addresses that closely resemble legitimate business sites and entice unsuspecting victims to click on their site.

Don’t be in a rush to get a “free” credit score. There are many legitimate companies offering one, including most of the credit card companies. If you’re going to take advantage of a free offer, be sure to validate the URL address and don’t give out your social security number or credit card information when signing up.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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