We assist people with understanding and improving their credit scores with great regularity. One of the questions that comes up frequently is why credit scores go up and down so frequently? Credit Scores are made up of five main components.
The first is making your payments on time (35% of your score). If you make, even one late payment in the very recent past, your score will drop dramatically. The second component is called your utilization ratio (30% of your score). This is looking at what percentage of your total credit limit is outstanding in the current month. There are 5 buckets that you are being measured on: < 10%, 10 – 25%, 25 – 50%, 50 – 100% and > 100%. You get brownie points for being under 10%, great shape if you are under 25%, and get points taken away if you are in the other two categories.
Lately I have seen several people with credit cards over the limit. This will really hurt your score. What is interesting about this component of the score, is that it is basing it on the day your credit card company releases your statement each month. That is the day when they will report to the credit reporting agencies what your balance is and what the limit is, and it will be measuring the utilization percentage. Many people mistakenly believe that if they pay the card in full each month, it doesn’t matter. But it does matter since the scoring model, as it stands, has no intelligence to know that the card will be paid in full a few weeks later….so you still must be cognizant of your ratio. This is the most frequent cause of month to month fluctuations in your score.
The third component is the length of time you have had credit established (15% of score). The longer trade lines are open the better. You never want to close credit cards that you have a good, long track record with, since your score will decline if you do this. If installment loans are paid off and closed, this will not help or hurt you.
The fourth component is the mixture of credit you have (10% of score). The scoring model likes credit cards (2-3 is good) and likes installment loans and mortgages. What it doesn’t like are consumer finance accounts. These are typically department store cards or 90 days same as cash offers. Opening too many of these will drop your score.
The last component is credit inquiries, they are 10% of your score. Just be mindful not to have anyone check your credit unless it is necessary. Starting in late September, you will be able to freeze all 3 of your credit scores for free, thanks to a new law that is going into effect. Given that this is free, it is highly recommended that you take advantage! This prevents unscrupulous actors from stealing your personal info and opening accounts in your name. So, scores will go up and down based on these factors every month but no need to be alarmed if it is +/- 20 points!
If you have questions or know someone who could use some advice, give us a call! Always happy to help!
Happy House Hunting!