Why does my credit score keep changing? And 5 other questions to ask right now about your credit score.

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.

Some things are a mystery.

For millions of Americans, their credit scores are one such baffling phenomenon, but there’s no reason why they should remain so. Why, for example, do people have bad credit scores, despite managing their finances, and never going into the red, while other people who take more financial risks have excellent credit? One reason: A long-held credit card will help your credit score, if you use it responsibly.

FICO Scores are calculated using many different pieces of credit data in your credit report. This data varies by credit bureau, but FICO Scores provide a good overall view of why you may have good (or bad grouped into five categories as follows: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

For Financial Literacy Month, MarketWatch spoke to TransUnion’s 

head of consumer education, Margaret Poe, who helped demystify some of the common issues about credit scores during a Barron’s Live webinar, among other sources. (You can read our two previous installments from that Barron’s Live conversation here and here.)

You do not have one credit score. “Each credit score depends on the data used to calculate it, and it may differ depending on the scoring model, the source of the data used, and even the day when it was calculated,” the Consumer Financial Protection Bureau says. “Usually a higher score makes it easier to qualify for a loan and may result in a better interest rate or loan terms.”

Here are six important questions to ask about your credit score:

1. What constitutes a good credit score?

good credit score ranges from 670 to 739 on the FICO scale and 661 to 780 with VantageScore, according to Experian, one of the three main credit bureaus along with TransUnion and Equifax
“A lender may have different criteria, however,” it says. “Many banks, for example, consider a score of 700 and above to be good. And many of the best rates and terms are available for applicants with even higher scores — in the very good or exceptional range.”

“Your credit report provides a detailed record of your credit and payment history. It shows how much debt and how many open accounts you have, and with whom, how long you have been managing credit accounts, and a historical record of how and when you’ve paid your bills,” Experian adds. “A credit score is a single number calculated using the information in your credit report.”

2. Why does my credit score keep changing?

Credit scores are volatile, so it’s good to keep an eye on them. They can change when you take action – from opening a new card to applying for a new home loan. Your credit score can go up when you pay off your credit cards on time, and maintain a low credit-utilization ratio (that is, you keep a low balance relative to your credit limit). And it can go down if you don’t pay your bills on time.

Here’s the good news: It’s natural for your credit score to fluctuate. It’s not a static thing, and neither are our financial lives. “We’re using our money differently. We are exploring new options,” Poe said. “We’re all out there living in the credit economy.” Whether you’re buying a new car or a new home, your credit score will impact whether (a) you are approved and (b) what interest rate you pay.

3. Is there a difference between a ‘hard’ and ‘soft’ credit inquiry?

What’s the difference between a “hard” and “soft” inquiry on your credit report? A hard inquiry occurs when you apply for a credit card or a loan. The lender pulls your credit, which will appear on your report and last for two years. A “soft” check is for other reasons, such as when a company is checking your credit before you’re hired, which will remain on your credit report for 12 to 24 months.

The main difference between the two: A soft inquiry does not have an impact on your score. “You may see it listed there and you may say, ‘Oh, my goodness, look at all these soft inquiries, but it’s really nothing to be alarmed about,’” Poe told MarketWatch. But if you see a hard inquiry that you do not recognize, it could be fraud and TransUnion recommends contacting your lender directly.

4. Will canceling credit cards hurt my credit score?

Closing your credit cards will hurt your credit-utilization ratio — the ratio between your credit-card balance and your credit limit. It is important to keep that ratio low, so carry a zero balance on any card that you cancel. However, most experts recommend keeping your credit-utilization ratio below 30%. (Read The Moneyist’s answer to a letter writer who wanted to cancel 10 credit cards.)

“Generally, a low credit-utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending,” according to Experian
“A higher rate, however, could be a flag to potential lenders or creditors that you’re having trouble managing your finances.” But with many cards this score is also aggregated.

5. How has the credit-score model changed?

Credit bureaus have made some important changes to how they calculate credits scores. Last year, credit bureaus removed most medical debt from consumers’ credit reports as of last July. Debt below $500 will not appear on credit reports. If a person has paid their bill in full, this will have been removed.  Debt that is in collections will appear on credit reports only after it’s been unpaid for a year.

U.S. consumers held a total of $88 billion in medical debt based on consumer credit records as of June 2021, the Consumer Financial Protection Bureau said last March. “Data from the CFPB’s Consumer Credit Panel show that in 2020, the median medical collection was $310, the mean medical collection was $773, and 62% of medical collections were under $490,” the report stated.

Factoring rental payments into credit scores has also helped Americans boost their credit score. Last year, property managers started reporting on-time payments and the history of renters to credit bureaus. As a result, credit scores jumped by an average of 46 points, a report from Esusu Financial, a company that provides rent payments to major credit bureaus, and Freddie Mac


6. How do you raise your credit limit?

If a person needs to raise their credit limits, talk to your lender, Poe said. In some cases, the bank will automatically raise your credit limit if you’ve been a responsible borrower. But in other cases, a formal request may be necessary. They may conduct a hard inquiry to do so. “You have to weigh the options to decide if it’s going to be worth the potential negative impact for the potential positive impact,” she added.

“Sometimes, a credit-card issuer will approach you about a potential credit limit increase without you having to request one,” according to Bankrate.com. “Lenders regularly invite cardholders to increase their credit limit, so keep your eye out for an email or online account message asking if you would be interested in additional credit. You may even receive a pre-approved offer without having to apply.”

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