If you watch your credit score, you might be like that reader – scratching your head and wondering why it’s changing so much.
Here is this week’s reader’s question:
My Discover card started providing my credit score for free each month. What I don’t understand is why it was 814 one month, then 794 the next month and now it’s 803. Nothing has changed in my life. I haven’t opened any new credit cards, my house has been paid off since 2004, and my car has been paid off in 2007. I pay all my bills every month in full and on time. So why is my credit rating fluctuating?
While I have to take my hat off to Discover for doing the right thing – provide free credit scores – seeing your credit score too often, along with too many sources, can be confusing.
Let’s explore the different credit scores, what causes them to change, and if you should be concerned about them.
What’s in your credit score
The credit score that Discover offers to its cardholders is the most widely used credit score, the FICO score. Here are the components FICO says enter this credit score:
- Payment history: 35%. Simply if you paid your bills on time.
- Debt level: 30%. How much debt you have, how much you’ve borrowed against your limits, and a few other factors.
- Length of credit history: 15 percent. How long have your accounts been established?
- Types of credit: 10 percent. The mix of credits you have, including revolving accounts, installment loans, mortgages, etc.
- Recent requests: 10%. Opening multiple accounts, which require surveys, in a short period of time can lower your score.
Keep in mind that your credit score is based on your credit history, so anytime something changes in your history your score can change as well. You are entitled to a free credit report each year from each of the three major credit bureaus by visiting AnnualCreditReport.com.
I don’t change – why is my credit score?
If I take multiple photos of you in an afternoon, would you look the same on each one? You will basically have the same appearance, but there will be subtle differences. Your hair, your posture, your clothes – things are going to change that could slightly alter your appearance.
Your credit score is like that. It’s a snapshot, a photo of your credit taken one second in time.
If you use credit cards, your balance is constantly changing. If the snapshot is taken before you pay your bill, you will show a balance. Immediately after, you won’t. If you have a mortgage or a car loan, the principal goes down every time you make a payment. With each passing month, the length of your credit history increases and the negatives weigh in a little less.
In short, even when you’re still, your credit history isn’t. Although the above factors suggest that your credit score is a simple, static mixture of five components, it is calculated using a complex and proprietary algorithm whose precise components and weighting are known only to FICO. .
Should we care?
It’s natural to think that if we’ve been doing things perfectly for decades, we deserve a perfect credit score. Good logic, but perfect scores are extremely rare and no score will stay exactly the same for a long time.
That’s the bad news, but here’s the good one. If you’re not going to apply for credit soon and have a consistently high score, don’t give it a second thought.
This reader, for example, cites three different scores over three months, ranging from a low of 794 to a high of 814. While this presents him with a murky picture, for a lender it is as clear as water. rock. She’s a rock star.
While the highest possible FICO score is 850, anything above 750 is unlikely to bring faster approvals or lower rates, as it is the minimum score that gets the best deal from most lenders. . Anything over 750 is just bragging rights. And since more than half of Americans now have a FICO score of over 750, it’s not worth bragging about.
However, when you should be worrying about your credit score, that’s when you might be able to borrow soon. If you’re near the magic number of 750, do all you can to get away comfortably, especially if you’re borrowing big, like a mortgage. For tips on how to do this, see “7 quick ways to increase your credit score. ”
Let’s make it more confusing
Our reader gets a free FICO score, easily the most popular credit score in the United States. But that’s not the only credit score. Equifax has a score that ranges from 280 to 850. The TransUnion score for Transrisk ranges from 300 to 850. The VantageScore 3.0 score ranges from 300 to 850. The Experian PLUS score ranges from 330 to 830.
Even your FICO score will differ depending on which credit reporting agency – Experian, Equifax, or TransUnion – issues it. And it’s worse: According to Consumer reports, FICO offers 49 different ratings to lenders, but only two to consumers. So when you apply for a loan, your lender is likely to look at a different score than what you see.
Why are there so many credit scores? Because it is a product developed and marketed to earn money. Credit bureaus want you to buy them. Websites like Credit Sesame, Credit.com, CreditKarma, and Quizzle offer them to entice you to join their sites. Find out and other banks offer them to encourage you to use their plastic.
In my opinion, when companies start peddling various scores by acting like inflatable tube men, they are doing no one a favor.
Now let’s make it simple
If you pay your bills on time, all the time, for long periods of time, you probably have a great credit score. Unless you’re about to borrow, don’t obsess over it. There is no price for perfection.
You should check your credit history from time to time to make sure there are no errors and that it correctly reflects your balances and payment history. And you definitely want to check your FICO score if you’re about to borrow.
But don’t pay attention to minor fluctuations, and for heaven’s sake don’t worry or be confused by the plethora of scores from companies handing them out as freebies.
Do you have a question you would like to answer?
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The questions I’m most likely to answer are those that will interest other readers. In other words, don’t ask for super specific advice that only applies to you. And if I don’t answer your question, promise you won’t hate me. I’m doing my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I am a CPA and have also obtained licenses in stocks, commodities, options capital, mutual funds, life insurance, the supervisor of securities and real estate. Do you have time to kill? You can learn more about me here.
Do you have more questions about money? Browse many more Ask Stacy answers here.
Disclosure: The information you read here is always objective. However, sometimes we receive compensation for clicking on links in our stories.
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