Your credit score is a vital financial number. It impacts where you live, what type of car you drive, and how much money you have left over after expenses. Lenders and other groups review your credit score to determine if you can handle debt and keep up with monthly payments. Raising your credit score will open up more opportunities, but credit scores don’t always budge. We’ll share what causes credit scores to change and how to improve your score.
What Do Credit Score Changes Mean?
Credit score changes reflect how lenders perceive your ability to handle debt and other expenses. A lower credit score tells lenders you may not be ready to take on new debt, while a higher credit score will indicate the opposite. Sometimes, credit scores fluctuate slightly with minimal movement. Other actions cause more dramatic credit score movements, impacting your ability to get financing.
When Do Creditors Report to Bureaus
Most lenders report to the main credit bureaus every month, but some reach out to bureaus more frequently. Creditors will report whether you paid the debt on time or late. Most creditors report payment history to all three bureaus, but it’s not required. Some creditors only reach out to Equifax, while others only reach out to TransUnion and Experian.
How Often Does Your Credit Score Update?
Your credit score can change every time a creditor provides new data about your payment history. Depending on your creditors and how often each one submits information to the bureaus, your score can change monthly, weekly, or daily. If you borrow money from multiple lenders, your credit score will change more often.
Why Do Credit Scores Change?
Credit score changes can have a significant impact on your life. They can speed up or slow down your path to a mortgage, auto loan, new apartment, or another major milestone. Understanding why credit scores change can lead to better decisions about your financial health.
Hard Inquiries
Creditors check your credit each time you apply for a financial product. This check makes creditors feel more confident about providing you with a credit card, loan, or other product. This check is a hard inquiry, and it will hurt your credit score in the short term. However, a hard inquiry won’t devastate your credit, with most people losing no more than five points. If you apply for new credit, you will get a hard inquiry.
Late Payments
Late payments will hurt your credit score, potentially leading to more problems. Interest will accumulate, and each missed payment makes it more challenging to catch up. This financial activity can stay on your credit score for up to seven years. Borrowers should avoid taking on more debt than they can afford. Fewer expenses make each obligation more manageable. Some people do a side hustle for extra income to avoid a late payment.
If you can’t make the payment on time, reach out to your lender to limit the damage. Lenders will work with you and delay reporting to the main credit bureaus if you pay soon. You can still save your credit if you miss the deadline. Creditors cannot report a late payment to credit bureaus if you pay it within 30 days after the due date.
Bankruptcies
Bankruptcies can get you out of debt or lead to a more manageable payment plan. However, filing for bankruptcy can decimate your credit score and remain in your report for up to 10 years. If you build up your payment history, your credit score can recover from bankruptcy, but it is an uphill battle.
Changes in Your Credit Mix
Creditors like to see that you can handle multiple types of debt. The main credit bureaus use your credit mix to measure your ability to manage those debts, making up 10% of your credit score. Therefore, you shouldn’t rush to take on various obligations to improve your credit score. Your credit score will increase if you successfully pay off a credit card, mortgage, and auto loan.
Age Of Accounts
Some people consider closing old, unused accounts, similar to how people spring clean their homes. However, you shouldn’t close accounts. Older accounts strengthen your credit score as they demonstrate your ability to manage debt. An old credit card shows experience. Closing an account deletes that experience from your credit report and can hurt your score.
Balances
Debt balances impact your credit utilization, a vital ratio that makes up 30% of your credit score. Credit utilization measures how much debt you owe versus your credit limit. For example, if you owe $1,000 in credit card debt and have a $5,000 line of credit, your credit utilization ratio is 20%. A credit utilization ratio under 30% will improve your score, but it’s ideal to have this number below 10%.
Asking for a higher credit limit will improve your ratio, but it will trigger a credit inquiry. The short-term pain can lead to long-term credit score growth. Requesting a higher credit limit doesn’t mean you should spend more money. This request simply improves credit utilization. You should pay off debts on time to avoid running into issues. Lowering your balances will increase your credit score.
Ways to Help Maintain and Improve Your Credit Scores
Borrowers can implement several strategies to improve their credit scores. We have outlined some best practices below.
Pay Bills on Time
Making payments on time strengthens your payment history. This metric makes up 35% of your credit score and can protect you from financial trouble in the future. Only incur as many expenses as you can afford.
Stay Below Your Credit Limit
Hitting your credit limit leads to a hard inquiry and a poor credit utilization ratio. Both of these events will hurt your score. Paying off debt helps you stay below the credit limit. You shouldn’t view a credit limit as your safety net. Getting close to your limit will hurt your score and can lead to higher interest from late payments. Interest will compound, making it more difficult to get out of the hole.
Prioritize repaying your balances and making on-time payments. Cut your expenses, grab a side hustle, and perform other necessary actions to improve your credit utilization. You can use a debit card to limit your spending to your checking account. Some debit card issuers report your financial activity to the major credit bureaus.
Apply For New Credit Only When Needed
New credit gives you more financing. These extra funds help consumers afford cars, homes, and other expenses. Occasionally applying for new credit will lead to a hard inquiry. One of these on its own won’t decimate your credit score since you’ll only lose a few points. However, submitting too many applications for new credit leads to multiple hard inquiries. These inquiries add up, and you may not get approved for credit. A rejected application won’t undo the effects of a hard inquiry. Only apply for new credit when you need it for a necessary purchase.
Try And Pay Your Balances in Full
Paying your balances in full will keep you out of many financial hardships. You won’t accumulate interest, and you’ll strengthen the two most crucial credit score categories: payment history and credit utilization. You can review income and expenses to find opportunities to pay down more debt each month. Every extra dollar adds up.
Get Yourself a Financial Management App
Using technology to guide your finances can improve your credit score. Some financial management apps provide insights and clear interfaces to help you manage your money. You can view your accounts and progress in a single dashboard. This way, you can track your spending, which would provide insights into how much you spend vs. how much you earn. With a financial management app, you can better manage your expenses and enhance your payment history. A better payment history will lower your balances, improving your credit utilization ratio and your overall credit health.
