Why You Shouldn’t Panic Every Time Your Credit Score Changes

With the internet almost constantly at the tip of your fingers, keeping tracking of your credit score has never been easier. Banks, credit card issuers, and free online credit monitoring companies all offer their services to help you stay virtually right on top of your credit score. But if you find yourself panicking every time you get an email from Credit Karma, it might be time to reevaluate your relationship to credit monitoring. Small month-to-month changes in your credit score don’t really matter*, and here’s why.

The most important thing to understand is that you don’t have just one credit score—you actually have many, and they are all calculated using different formulas. The most well-known credit score is your FICO score, which is calculated and monitored by three different bureaus: Equifax, Experian, and TransUnion. All three institutions have different levels of access to your information at different times and are constantly updating your files with every piece of information they receive.

What’s more, each credit rating category covers a wide range of scores. “Good” credit falls in the 670 to 739 range. Unless you are teetering on the edge between categories, a couple of points difference isn’t going to impact your credit worthiness too greatly. There are a myriad of reasons why your score will go up or down in any given month, and none of them truly reflect your overall credit health. Delayed credit bureau reporting, hard inquiries, balance increases, or opening a new account can all cause temporary, insignificant shifts in your credit score.

Fixating on small credit fluctuations is stressful and unnecessary. As long as you are not currently in the process of applying for a new loan or a new line of credit, a less than stellar score will have little impact on your every day life. The good news is that even if your credit score has recently taken a small dip, most lenders will look at the big picture, taking your credit history into consideration, not just your current three-digit score. It’s the big swings that you need to watch out for.

A major change in your credit score can alert you to unauthorized activity on your accounts or tip you off to the long-term impact of carrying high balances and paying your bills late. It is important to pay attention to these changes to make sure they reflect your financial activity. If your monitoring service reports a change you don’t recognize or understand, look into it. Whether it is the result of fraudulent activity or just poor financial habits, it is important to investigate why your credit score is changing so dramatically.

If you are concerned about your credit score and it isn’t exactly where you want it to be, don’t panic. At Veitengruber Law, we can give you real facts about credit and debt. Our legal team can provide real life solutions to improving your credit and your overall financial health. With patience, time, and dedication, it is possible to repair your credit. Using credit monitoring services is a great first step in the right direction. Just remember not to take every small monthly fluctuation to heart and stay focused on your overall credit goals.

*If your score takes a significant plunge, drops into a lower category, or is on a consistently downward trend, reach out to us. If something is amiss, it IS better to address it sooner rather than later.

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FICO Score vs. VantageScore: What’s the Difference?

fico score

Your credit score is one of the most important aspects of your overall financial profile. Potential lenders and creditors will use your credit score to determine what kind of risk they are taking by giving you a loan or a line of credit. Essentially, your credit score is your entire credit and financial history all boiled down to one number. Consequently, you may be surprised to know that there are actually many different ways to calculate a credit score. The two most popular ways to estimate your credit score are using the FICO scale and the VantageScore scale. Below, we will discuss the differences between them and how they can impact your credit score.

Details of your debt and financial history are reported to three major credit bureaus: TransUnion, Experian, and Equifax. These institutions will compile your payment history, total debt, amount of unused credit, the diversity of your credit lines, and other financial data to create your credit report. That data is then run through an algorithm which will provide the three-digit number that is your credit score. These three bureaus compile data and store your information differently, which can mean your credit report—and therefore your credit score—will look different depending on the scoring system used.

The FICO Score credit scoring model ranges from 300 (very poor credit) to 850 (EXCELLENT credit). This is the most well-known scoring method, and over 90% of big lenders in the country use the FICO credit scoring method. While there are many different versions of the FICO method, FICO8 is used most often by lenders today. While FICO doesn’t like to give out a lot of information on how they compile data, the rough breakdown of your FICO8 credit score is: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% credit diversity.

In 2006, the credit bureaus created the VantageScore as an alternative to the FICO Score. Vantage is similar to FICO. It still ranges from 300 (poor credit) to 850 (incredible credit) and there are multiple versions of the VantageScore method. The current industry standard is VantageScore 3.0. The biggest difference between VantageScore and FICO is that VantageScore doesn’t value the length of your credit history. While FICO requires you to have 6 months of data, VantageScore has zero time requirements. The components of the VantageScore system are also different: 40% payment history, 21% depth of credit, 20% credit utilization, 11% balances, 5% recent credit, and 3% available credit.

There are several ways to access your FICO Score and your VantageScore. Some big banks and issuers will offer their customers their credit scores on their monthly statements. Chase Bank, Capital One, and OneMain Financial use VantageScore while Bank of America, Discover, and Citibank prefer FICO. Experian also offers free access to your FICO Score and VantageScore. Keep in mind, though, that your FICO Score and VantageScore can vary from credit bureau to credit bureau, so Experian may provide a different score than TransUnion or Equifax even if they are using the same scoring method.

If there is one big takeaway from comparing these two credit scoring models, it’s that payment history is the most important factor that goes into determining your credit score, regardless of the model used for calculation. Despite their similarities, however, the differences in methods can result in some deviations where your credit score is concerned. This is why it doesn’t hurt to know what your credit score is under both scoring methods. Regardless of differences, as long as you keep up with at least one model, you should have a good idea of your financial standing in the eyes of creditors.