Does your credit score fluctuate every month? Up a few points one month, down a few points the next… why won’t it stabilize? If you’re like most Americans these days, you keep a pretty close eye on your credit score, but honestly, it’s just frustrating when it goes up five points one month, only to drop ten a month later! What causes these monthly fluctuations? And even more importantly, is it something that you should worry about?
Here are the most common reasons why your score changes:
New Credit Inquiries: Signed up for a new credit card lately? Bought a car? A house? Anytime you take out, or in some cases, consider taking out a new line of credit, at least one credit inquiry is likely to hit your credit report. And, while the effect is minimal, you’ll still see your score drop at least a point or two in most cases. Fortunately, the effect is short lived, and most credit inquiries drop off after a year or so.
Closing a Line of Credit: If you’ve just paid off a credit card bill that you’ve had for a long time, it can be really tempting to close that account, but try not to close older accounts unless you absolutely have to – closing just one long standing account will make your credit history shorter, and your credit score may drop a few points.
Missing a Payment: Your payment history is a big factor in determining your credit score, and just one missed payment will likely hit your credit report fairly quickly, causing your score to noticeably drop. Unfortunately, missed payments typically stay in your credit file for seven years, so the effect can be far reaching.
Credit Card Balances: Since your credit card balances vary from month to month, it’s not uncommon for your credit score to go up (and down) a couple of points each month due to that variance. Pay a card off and you’ll see your score go up. Use one that you haven’t used in a while and you’ll see your score drop. Even though this is a normal occurrence, keep in mind that your credit utilization is an important part of your score, so don’t let credit card balances get out of control.
Bankruptcy: Even though most people know that filing bankruptcy will affect your credit score, many people are unprepared for the nosedive your score takes immediately after the filing hits your credit report. Unfortunately, bankruptcy will stay on your report for 7-10 years, so consider all of your options carefully before you file.
Credit Mix: Your credit mix typically accounts for about 10% of your score, so make sure you only apply for accounts that you intend to use. Credit cards, installment loans, department store cards, auto loans, mortgages… all of these are a part of your credit mix. Unbelievably, I know of several people whose credit score improved after buying a house simply because it changed their credit mix.
Credit History: About 15% of your score has to do with the length of time you’ve had credit, so you may see your score tick up a few points a year simply because you’ve had credit a little longer than the month or year before. But, you can also see that score tick down when you close an account (or open a new one), since your credit history is affected.
Identity Theft: Although no one likes to even hear the words identity theft, in the event that your identity is stolen, you will likely see a dramatic effect on your credit score that can be difficult and costly to sort out. Identity theft is perhaps THE most important reason to check your credit score on a regular basis, review individual accounts, and report anything unusual as soon as possible in order to minimize the damage done.
Did you know that up to 50% of us can’t tell you if there’s been a change in our credit reports? Monitoring your credit takes only a few moments each month, and those little fluctuations can be frustrating, but just remember – minor fluctuations are normal, but keeping track of them is crucial. A few points one month won’t make much difference, but a few points every month in the wrong direction could create significant problems for you in the future.