By ANNA TRINH
Seeing your credit score improve can be a huge weight off your shoulders. It can feel like all the hard work you've been putting into your finances is finally paying off. But if you're wondering why your score might have jumped, here are some possible explanations.
1. You lowered your credit card utilization.
If you've recently paid off some credit card debt or got a credit limit increase, your score jump might be because you're using less of your available credit. Your credit card utilization is the total amount of your credit card balance compared to the total of your credit limits.
Let's say you have three credit cards, and each card has a $2,000 limit:
Card #1 has $2,000 limit and a $1,000 balance-- a utilization rate of 50 percent.
Card #2 has a $2,000 limit and a $1,500 balance-- a utilization rate of 75 percent.
Card #3 has a $2,000 limit and no balance.
Your total debt is $2,500. Your total available credit is $6,000.
To figure out your utilization rate, we would divide your total balance by your total available limit:
($2,500/$6,000) x 100 = ~42 percent
Your credit card utilization is a little higher than what lenders would consider ideal (a good rule of thumb is to keep it under 30 percent if you can).
Say you fully pay off Card #1. Your new total debt across all your cards is now $1,500 and your new utilization rate is:
($1,500/6,000) x 100 = 25 percent
In this case, you might see a credit score increase as your utilization is below 30 percent (if all other factors remain equal).
Alternatively, let's say that instead of paying off one of your cards, you got a credit line increase on Card #1 from $2,000 to $5,000.Your total debt would still be $2,500, but your utilization rate would decrease since you now have a bigger credit limit:
($2,500/9,000) x 100 = ~28 percent
Keep in mind that in both these scenarios, your credit card utilization rate will only decrease if your spending habits with your credit cards remain the same.
2. Your age of credit history went up.
Your age of credit history is one of the factors lenders use to assess your experience with credit. Depending on the scoring model, your age of credit history can include the average age of all your open accounts, or it can also include the age of closed accounts in good standing.
VantageScore determines your age of credit history by averaging all your current open accounts. FICO, on the other hand, calculates your age of credit by averaging the age of the accounts on your report, whether or not they're closed.
There's no universal threshold that you cross from bad age of credit history to good. Generally, credit score models assess people with longer credit histories as lower-risk borrowers than consumers who have only recently started building credit.
If your credit history is longer, lenders have more information about your financial habits. And since your credit file is a reflection of your financial decisions, having a longer credit history gives lenders a bigger picture of you as a potential customer.
Keeping older accounts active and in good standing can help you build a positive credit history. Heather Battison, a vice president at TransUnion, recommends "using a credit card for an extended period of time (because) this activity establishes credit history, which in turn strengthens your credit score."
So if you've been using credit responsibly for a while and you haven't applied for any new lines of credit or closed any older accounts recently, it's possible that your average age of credit history went up, and your score rose as well.
3. A negative item dropped off your credit report.
If a derogatory mark recently fell off your credit reports, congratulations! This may have caused your score to jump up.
A derogatory mark can include collection accounts, bankruptcies, tax liens, civil judgments, foreclosures, and charge-offs.
Derogatory marks typically stay on credit reports for seven years or longer. Lenders tend to be more cautious of consumers who have derogatory marks on their report since those marks indicate that they've had trouble managing credit in the past.
You can confirm which accounts dropped off by viewing your full credit reports.
4. You added a new account.
Opening new accounts can both positively and negatively affect your credit scores. The hard inquiry into your credit performed by the lender, for example, can affect your score negatively for a short period of time initially.
In addition, a new account can cause your average age of credit history to decrease, which could impact your score. However, this depends on the scoring model being used since some models take into account closed accounts and others don't.
However, new accounts have the potential to help your credit scores. If the new account is a credit card, then your total available credit limit will increase, which could decrease your utilization rate (assuming your spending remains the same).
If the new account is an installment loan, such as an auto loan, mortgage, or any fixed payment loan and your credit report doesn't already list one, you now have a greater mix of accounts, which is considered a positive score factor. Having a mix of accounts gives lenders a better picture of how you pay down those balances each month.
5. You received your score from a different source.
There are a number of reasons why your scores can vary from lender to lender, bureau to bureau, and even within the same bureau.
Some of the reasons why you might have received different scores from Credit Karma than your lender (or vice versa) are:
- Information that appears in your reports may be updated at different times
- Not all of your credit reports will reflect all of your accounts; some lenders only report to one or two bureaus rather than all three.
- The bureaus or lenders may use differing scoring models.
To get the best idea of your overall credit health, it's a good idea to stick to one or maybe two credit score sources to monitor your reports as most models rely on the same credit factors to calculate your score.
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