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.

Understanding Your Credit Report

Photo courtesy of Tax Credits

Your credit report is essentially your entire financial history all tied up neatly (ideally) into one document. The general purpose of a credit report is so that potential lenders and other institutions whom you may enter into a financial contract with, can have a relatively simple way to assess your ability to remain financially solvent and responsible. This helps lenders decide whether you are someone they’d trust to pay them back.

Due to The Fair Credit Reporting Act, you have the right to receive a free yearly copy of your credit report from all three of the major credit reporting bureaus: Equifax, Trans Union, and Experian. Getting a hold of your credit report is actually the easy part. Reading them with a decent level of comprehension may be a different story, especially if your credit information is lengthy or contains multiple adverse or potentially negative items. Regardless, it is important that you understand what you’ll be presented with when your credit report arrives in the mail. Taking a moment to learn about the parts of your credit report means that you’ll be better able to make improvements where possible and pick up on any reporting errors.

The information used to create your credit report and your overall credit score (different from your report, but very closely related), comes from any companies with whom you have done or are currently doing business, and from information in public records. The general information gathered includes your given name, any aliases, your current place of residence (plus all past addresses), birth date, and your Social Security number. Once your identity has been authenticated, the following information will be gathered: your bank/credit accounts, loans, mortgages, payments, delinquencies, bankruptcies, short sales, foreclosures, court cases, and any wage garnishments.

All of this information will be listed on your report, and each item’s importance differs. Your financial details are divided into the following five variably weighted categories to calculate your overall credit score:

  1. All accounts in use (10%): Included in this category are all of your credit cards, loans, mortgages, garnishments, etc.
  2. Recently acquired accounts and inquiries from creditors (10%): Accounts and loans that you have very recently opened or applied for fall into their own section because it tells creditors that you may be taking on debt that they don’t know about. When you apply for a credit card or another type of loan/financing, each potential lender will want to know your credit history, and their inquiries into your credit history will be noted on your report. For these reasons, applying for too many loans or credit cards sends up a red flag on your credit report.
  3. Your credit history length: (15%): How long have you been using credit cards and/or loans?
  4. Debt to credit ratio: (30%): This is the amount of money you owe as compared to your overall credit limit. High credit card balances on which you make minimum payments will lower your credit score. On the flip side, a high credit limit while maintaining relatively low balances means your debt to credit ratio will raise your credit score number.
  5. Your ability to make payments! (35%): Your success or failure at keeping all of your accounts current and making timely payments is obviously a crucial component when it comes to having a good credit report and; therefore, a high credit score number.

If you need further assistance interpreting all of parts of your credit report, or are interested in taking steps to improve your credit rating, drop us a line in the comment box. Visit our Facebook page and get a free consultation just for “liking” our firm!