Series: Breaking Down Changes in Your Credit Score

A recent survey of 1,000 Americans by VantageScore and the Consumer Federation of America shows that almost half had no idea that credit scores are supposed to indicate the risk of not repaying a loan. There’s a lack of quality public information on the basic purpose of a credit score, what a credit score means to the consumer, and when this score truly matters. The marketing tactics that some credit score sellers use also cause a lot of confusion.

I’ve previously broken down what a credit report and credit score is. I now want to help you understand what it means to you.

Why Does it Seem Like My Score Changes Everyday?

 One of the most frequent causes of confusion when it comes to credit scores is fluctuation in the score.

You may notice that your credit score will vary by small amounts, say 20 or 30 points, each time you check it, even if you check it frequently.

There are few simple reasons why this happens. First, different companies use different algorithms to derive your score. Services like CreditKarma or CreditSesame use real-time information to show you a score each time you log in, so depending on the day and your activity, you can expect to see some fluctuation. Your credit report is also generally updated every 30 days, and your score is derived from your report. At a more granular level, there are complexities in the actual information available on your report when it’s pulled. Let me dig into two examples:

Opening an account: Suppose you open a new credit card account. Your credit history will affect the degree of change in your credit score, but it’s likely that your credit score will go down to some extent. This is because it will make the average length of your credit history shorter. As you start making on-time payments on this account and you keep the account for a longer period of time, your credit score may increase. If a lender pulls your score before you make your first payment, the credit score they derive might be slightly lower than the score they derive if they were to pull it after, and so on.

Limit Utilization: Another example of the sensitivity of a credit score has to do with your credit card limit utilization. Let’s say it’s the middle of the month, and you’re just about to pay off your credit card. You’ve utilized 30% of your credit limit. At the beginning of the month, you’d used about 15% of your total credit limit. If a lender pulls your report and calculates a credit score, your score might look slightly better at the beginning of the month compared to the middle.

These examples are a few of many on why your credit score might fluctuate despite consistency in your month-to-month financial behavior.

 What Periodic Changes in My Score Should I Expect?

 These three pieces of information can serve as guide posts to understanding periodic changes in your score —

Current credit profile: Your credit profile relates to your credit history. If you have very limited credit history, for example, opening a new account is going to have a drastic effect on your credit score. On the other hand, it may have a very minimal effect if you have years of credit history.

Degree and type of change: The degree of change in your behavior will dictate the mark made on your credit score. An inquiry for a new line of credit will have much less of an impact on your credit for example than a late payment. Unfortunately, your credit score is also much more receptive to negative actions than positive ones. A late payment can dent your credit score by 20 to 30 points, yet recurring, on-time payments, won’t necessarily increase your credit score for some time.

Frequency with which lenders update: Your credit score is updated based on the frequency with which lenders update the 3 major credit bureaus – Equinox, TransUnion and Experian. Many lenders provide these updates once a month. They may update 1 or more, but not all of these bureaus.

How often should you really be checking your credit score?

 Now that you’re an expert on the many ways your credit score can vary, I want to talk about what’s most important. Thanks to companies like CreditKarma, there is a heightened paranoia around the ever-changing credit score, and encouraging consumers to check their scores with excessive frequency. There’s a lot of money to be made in getting consumers to pay for credit monitoring services, and in the referral revenue that comes from product recommendations shown in the context of your credit behavior.

Checking your report and score this frequently is absolutely unnecessary. According to the Consumer Finance Protection Bureau, you should check your credit report and score once a year. It’s wise to do this to make sure there are no errors in your credit report, and to guard yourself against identify theft. The only reason to check your credit report and score beyond this is if you’re planning a financial decision that will require access to credit – like buying a home or car that will require a loan.

So, if you see a small fluctuation in your credit score, or you hear that you should be checking your credit report every day, don’t be alarmed. You now know that the fluctuation is completely normal, and you know how your credit report and score matter to you.

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