It’s hard to overstate the importance of your credit score. This three-digit number can be the difference between getting a loan approved or denied and whether you’ll qualify for a low interest rate or a high one. Your score can also help a creditor determine which interest rate to charge on your mortgage, credit card, car loan or home insurance policy.
There are a few things you should know about credit scores. One is that, generally, the higher the score, the better. Secondly, scores change. A credit score pulled in April may be higher or lower than a credit score pulled in May, for example. Third, there are many different credit scores. A credit score you see may not be the one a particular lender uses.
Understanding when, why and how credit scores fluctuate throughout the year will help you create a strategy for healthy credit.
When Credit Scores Change
A credit score is a snapshot in time based on data in credit reports produced by one, two or three national credit bureaus. When a financial institution asks for your score, the figure is calculated based on the latest available data.
In general, the national credit bureaus receive data from lenders every billing cycle. Considering that time lag, a credit score today may be built, in part, on data from the last 30 to 60 days.
Paying off your balances for a few months might cause your score to increase, in some cases by several points. However, most credit scores take the long view, factoring in certain credit behaviors demonstrated since the time you first started using credit.
Why Credit Scores Change
Credit scores can change for a variety of reasons. Simply opening a new line of credit for, say, an auto loan almost always means the creditor issuing the credit will make a “hard inquiry.” This can push your credit score slightly lower for a brief period of time.
Scores generally also decline if you fail to make minimum payments on credit cards, miss a mortgage payment or have a bill sent to collections. Typically, scores improve when you pay off debt, keep your credit card balances low, and make payments on time, to name just a few reasons.
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How Credit Scores Change
Different factors have a role in determining a given credit score. Generally some combination of the following plays a part:
Payment history—do you pay your bills on time?
Debt levels—how much debt have you taken on?
Account credit history—for how long have you been credit active?
Account mix—do you have a variety of loan types (revolving credit, installment loans, mortgages, etc.)?
Recent inquiries—how often do you apply for new credit?
There are a few good credit practices to follow based on factors used to determine most scores. For example, clean up lingering debt as quickly as feasible and stay away from putting too much credit on your cards. In addition, read your credit report closely and dispute any item you believe to be inaccurate.
Nothing happens overnight in the world of credit reporting and credit scores, so don’t be surprised if it takes several months to see an impact. That said, the saying “slow and steady wins the race” applies pretty well to the process of establishing and maintaining healthy credit.