Why you shouldn't (necessarily) freak out when your credit score drops

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Why you shouldn't (necessarily) freak out when your credit score drops


You make a habit of regularly checking your credit score. So when you notice a score drop, you might think something's up.

However, a credit score drop isn't always an indication that you're doing something wrong.

Nancy Bistritz, director of public relations and communications at Equifax, says, "it's not uncommon for [credit scores] to fluctuate from day to day."

Changes to your score may be due to new data in your credit file, but they could also result from a change in the scoring model used to calculate your score.

Here are four common reasons for why your score might move.

1. Your account balance changed.

"Changes in account balances can affect utilization ratios and total outstanding debt, both of which can briefly impact a score," says David Blumberg, a public relations director at TransUnion.

You can find your utilization rate by dividing your total credit card balances by your total credit limit (the combined limits of all your cards). For example, say you have two credit cards with limits of $5,000 and $7,000 respectively. Your statements show that you've spent a total of $6,000 across both cards:

[ $6,000 / ($5,000 + $7,000) ] = 50%

So even if you pay the balance in full after receiving your statement, you could have a high utilization rate -- which can negatively impact your score.

Why you may not need to worry

Blumberg says that once you get the reported balance back down, perhaps by making your payment in full and making fewer purchases the following month, it should result in your score moving back up if other factors stay the same.

2. You applied for a new line of credit.

Lenders may check your credit report when you apply for a new loan or line of credit. The check is usually recorded on your report as a hard inquiry into your credit, and it may temporarily lower your credit score by a few points.

However, the impact could increase if there are multiple inquiries during a short period, if you don't have a lengthy credit history or if you only have a few accounts.

Some credit scoring models group similar inquiries -- such as inquiries for an auto loan or mortgage -- that are made within a certain amount of time, often 14 to 45 days. These would only count as a single hard inquiry for scoring purposes.

Hard inquiries typically remain on your credit reports for two years, but they generally have the biggest impact on your credit score in the first few months.

As you review your credit reports, you may also see a section with soft inquiries. These can occur when you check your credit or a company prescreens you for an offer. They don't impact your credit score.

Why you may not need to worry

The impact from a single hard inquiry is often small and fades away within several months.

3. You opened a new account.

Opening a new credit card or loan can also negatively impact your credit score. This is partially because the new account can decrease your average account age, which is often a factor in your credit score. Some scoring models also consider the age of your newest account.

Opening a single new account generally shouldn't have a large impact on your score, particularly if you already have a well-established credit history. If you're opening a new credit card, the initial drop from the hard inquiry when you apply may be mitigated by your increased credit limit (which can lower your utilization).

The impact may be greater if you're new to managing credit or loans, or when you open several new accounts at once.

A potential score drop from opening a single new account may disappear within about three months.

Why you may not need to worry

If you're only opening one new account, there may not be a large or long-term impact to your credit score.

4. The scoring data or model changed.

Your credit score can vary depending on which credit bureau, credit report and scoring model are used when you request a score.

You can ask the company that supplied your credit score if it recently switched any of these factors. This could explain why your score is different from the one you got the last time you checked.

This is also why you might see two different credit scores if you check your score at different places. For example, Credit Karma uses VantageScore 3.0; however, some banks let you access a FICO score.

Regardless of whether or not there was a change in the bureau, report or model, you may want to check your credit reports to see if something else could have contributed to the drop.

Why you may not need to worry

You can't control which credit data or model a lender uses to calculate your score, but many lenders use scoring systems that rely on the same fundamentals.

Focusing on improving the basic factors that can impact your score, such as your credit utilization rate and payment history, can help improve your credit with most scoring models.

When should you worry about your score dropping?

At what point does a small credit score drop become a problem?

Sarah Davies, a senior vice president of analytics, product management and research at VantageScore Solutions, recently published an article on what lenders think about credit score drops. She writes, "declines of fewer than 40 points are often the result of day-to-day credit management actions, which do not necessarily reflect a substantial increase in risk."

However, that doesn't mean a small drop is always inconsequential. If you're near a lender's required minimum score for applicants, even a small drop could be the difference between getting approved or denied for a loan or line of credit.

The good news is that a small drop may be easy to remedy if you manage your credit wisely.

If it's the result of an increased utilization rate, your score could bounce back soon after a lower utilization rate gets reported. There's nothing you can do to speed up the recovery from a hard inquiry or opening a new account, but when they result in a score drop, it often only lasts a few months.

On the other hand, a score drop of more than 40 points may indicate that a significant negative mark, such as a late payment, has appeared on your credit reports. A single late payment could result in a score drop of over 100 points. While the effect diminishes over time, it can impact your score for more than a year.

Bottom line

If you check your credit score often, you may notice small fluctuations from one day to the next. This is normal behavior for credit scores, and you shouldn't necessarily be concerned if you see a small drop.

Instead, you may want to focus on long-term habits that can improve your credit, such as only using a small percentage of your available credit and making on-time payments.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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Helpful to 4 out of 5 people

I am not a fan of the credit reporting agencies. Unreasonable and unrelable. What they report is the law of the land, even when the credit history isn't accurate. My score is above 800 with the two on this site. Yet each is months (It's August; the last updae was in May)  behind. They have too much power over anyone's borrowning capabilties. I'm not certain if the government shoud take over, but I'm willing to take that chance. Be gone, all of them.

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0 People Helped

Enter Your Reply.  I agree.  Also they make it hard to figure out how they determine your score.  It should be easy to manipulate.  It is not.

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Credit can have a great impact of where you want to live. Even if you have bad credit but you can be great on paying your rent. I think it no fair to judge one by credit. I have pay off  three cars. This scoring System need to be adress and change. I can now get a new car. I would have to pay hign monthy  payment and interest base on my credit. It does not matter that I paid off three cars. I cannot get a credit card or anything because they run your credit and make a decsion best on my score. I think people are judge to hard because of the credit system. I agree it is too much power over one possible. Companies are out there taking advantage of people with bad credit charging high intrest rates becase of credit or scoring not high enough . Some credit should matter on some things and not on others things, Such has renting and some credit card. We still need to take care of the basic needs of our life..

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