Why Does My Credit Score Go Up and Down?

Whether we like it or not, credit scores play a crucial role in our financial lives. They’re a three-digit number that reflects our creditworthiness, aka our financial responsibility that indicates how likely we are to repay a loan or credit card balance on time. 

While those who borrow frequently may strive to achieve a high credit score, the reality is that our credit score changes over time. Why? Credit scores are influenced by various factors, some within our control, others not. 

Highlights/Key Takeaways

• Credit scores measure an individual's creditworthiness and can fluctuate over time due to various factors.
• Understanding the factors that impact credit scores, such as payment history, debt levels, and credit utilization, can help you maintain good credit.
• Good credit is important for accessing loans, credit cards, and other financial products with favorable terms and conditions.
• Regularly monitoring your credit score and report can help you stay on top of errors and identify areas to improve.

Is it Normal For Credit Scores to Fluctuate?

Occasionally, and depending on your financial habits, your score will fluctuate by just a few points or can make huge jumps up or down. These small jumps are normal, but you may be more concerned about sudden changes. To combat that concern, here are some important points to keep in mind:

• Individuals don’t have a single credit score. You have multiple credit scores generated by different credit bureaus or lenders. These scores can differ based on the methodology each bureau uses to calculate them.
• Credit scores are calculated based on the information present in your credit report. Any changes to your credit report, such as late payments or new credit applications, can bring your credit score down.
• Changes to your credit utilization rate, which is the amount of credit you're using compared to the total amount of credit you have available at your disposal, can also affect your credit score.
• Some credit score fluctuations may be due to errors or fraud on your credit report. 

Why Your Credit Score Changes so Much 

There’s a long list of reasons your score changes. Every time new information is added to your reports, your score is likely to change. Additionally, the way you use your credit matters. You must use financial products responsibly in order to keep your score on the up and up.  

Your Payments

Your payment history is one of the most significant factors that impact your credit score. In fact, it accounts for 35% of your FICO credit score.

Late or missed payments can cause your score to drop quickly, especially if you frequently miss multiple payments. On the other hand, consistently making on-time payments can help raise your score over time. 

Any late payments you make can stay on your credit report for up to seven years and can have a significant impact on your credit score throughout that time. These late payments won’t be reported to the credit bureaus until at least 30 days passed the missed payment date. 

You can potentially remove a late payment early with a goodwill letter. A goodwill letter is a written request to a creditor asking them to remove a negative item from your credit report, such as a late payment or delinquency. The letter aims to appeal to the creditor's sense of goodwill and ask for their understanding and forgiveness of a one-time mistake.

Your Debt 

The amount of debt you have compared to your total credit limits, also known as your credit utilization ratio, is another factor that will significantly impact your credit score. It makes up 30% of your FICO credit score, and credit utilization indicates how much of your available credit you are using. Generally, the higher your credit utilization ratio, the more it can negatively impact your credit score, as it signals to lenders that you desperately need borrowed money. 

Paying down your debt is the quickest way to help your credit utilization ratio and, in turn, your credit score. 

Your Credit History 

Your credit history records how you've managed credit accounts over time and makes up 15% of your FICO score. Generally, the longer your credit history, the better your score, as it provides more information about your credit behavior. 

Additionally, a more extended credit history can demonstrate to lenders that you have more experience managing credit accounts responsibly. Since all your accounts are considered in your history, closing older accounts you may not use can hurt your score. Doing so eliminates an entire account on your report, making it look as if you haven’t had accounts for as long as you have. 

Your Credit Mix

Your credit mix includes the different types of credit accounts you have, such as credit cards, personal loans, car loans, and mortgages. While it only makes up 10% of your FICO score,  having a mix of different credit accounts can positively impact your credit score overall. This mix of credit accounts demonstrates to lenders that you can responsibly manage different kinds of debt. 

New Credit Accounts

Opening a new credit account will almost always lower your credit score temporarily, as it results in a hard inquiry on your credit report. A hard inquiry is when a lender checks your full credit report to evaluate your creditworthiness, as opposed to a soft credit check which just gives them a general idea of your score. 

New credit accounts for 10% of your FICO score, so it’s not much, and these hard inquiries can be overridden by on-time payments and reducing your credit utilization ratio. That said, if you open too many new accounts all at once, you could see a more substantial drop in your score, so proceed with caution. 

Bankruptcy 

Filing for bankruptcy is a long and difficult process that can wreck your credit score, and the bankruptcy itself can stay on your credit report for up to 10 years. A bankruptcy filing can cause your credit score to drop by several hundred points, making it challenging to obtain new credit in the future.

Chapter 7 and Chapter 13 bankruptcies are two of the most common types of bankruptcy, and, while both types of bankruptcy can have a significant negative impact on your credit score, each has a slightly different effect.

• Chapter 7 bankruptcy, or liquidation bankruptcy, involves selling non-exempt assets to pay off creditors. The process typically takes a few months to complete, and the bankruptcy will remain on your credit report for up to 10 years from the filing date.
• Chapter 13 bankruptcy, or reorganization bankruptcy, involves creating a repayment plan to pay off creditors over three to five years. The bankruptcy will remain on your credit report for up to seven years from the filing date.

Credit Report Errors 

Unfortunately, errors on credit reports aren’t uncommon. Even the credit bureaus make mistakes. These errors are often simple and can include incorrect account information, debt listed more than once, or, worst-case scenario, fraudulent activity. 

Thankfully, it’s relatively easy to dispute credit report errors with the three bureaus. The Consumer Financial Protection Bureau offers contact info for all bureaus. Correcting errors can help restore your score and ensure that it accurately reflects your true credit history.

Good Credit Scores vs. Bad Credit Scores 

Lenders use your credit score to determine your eligibility for loans, credit cards, and most other financial products. Credit scores are ranked on a scale of 300 to 850, with higher scores indicating better creditworthiness.

Here's a breakdown of FICO credit score rankings:

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Exceptional: 800 to 850

A good credit score can make it easier to obtain credit, resulting in excellent credit loans with more favorable terms and interest rates. On the other hand, having a poor credit score can make it challenging to obtain credit and may result in higher interest rates or outright denials of credit applications.

Why Good Credit Matters

Does your credit score really matter? The answer is a resounding yes. Maintaining good credit is important for many reasons, from being able to qualify for loans and credit cards to securing better interest rates and more favorable loan terms. Here are a few of the benefits of having good credit:

• Ability to qualify for credit: Good credit is often a prerequisite for obtaining loans, credit cards, mortgages, and other forms of credit. A strong credit history shows lenders that you're a responsible borrower, increasing your chances of approval.
• Ability to borrow high loan amounts: With good credit, you may be able to borrow more money than you would with poor credit. 
• Ability to access better interest rates: Good credit can help you secure better interest rates on loans and credit cards, saving you money over your loan. Lenders see borrowers with good credit as less of a risk, so they may offer lower interest rates to incentivize borrowing.
• Easier to rent an apartment: Yes, you even need credit to rent an apartment. Landlords often check credit reports as part of the tenant screening process, and having good credit definitely increases your chances of being approved for a rental.
• Sign up for utilities without paying a security deposit: Utility companies may require a security deposit for customers with poor credit since this may indicate that you’ve managed money poorly in the past. However, with good credit, you likely won’t pay a deposit to sign up for utilities.
• Makes a good impression on potential employers: Some employers may check credit reports as part of the hiring process. Having good credit can give potential employers a positive impression of your financial responsibility, which can be especially important for jobs that require handling money or sensitive financial information.

How to Keep Your Credit Score in Good Condition

Getting your score to a good spot is only half the battle. You also have to maintain it over the years, as one small setback can lower your score. Here are a few tips to help you keep your score up. 

Pay Your Bills on Time

The number one thing you can do to maintain a good credit score is to pay all your bills on time, every time. On-time payments make up the largest chunk of your credit score. The longer you hold onto your record of on-time payments, the more your score creeps up.  

• Tip: Sign-up for automatic payments so you never miss a payment.

Reduce Your Credit Card Debt

Getting into debt is a surefire way to see your score plummet. If you’re already at that point, create a plan that can help you start to chip away at your debt. Additionally, you may want to consider credit counseling to address the route of your debt problem. 

• Tip: Build up an emergency fund to help reduce your reliance on credit cards and other credit products. 

Keep Your Credit Utilization Low

Maxing out your credit cards raises your credit utilization, which can seriously negatively affect your score. You can keep your credit utilization low by keeping your debts low and increasing credit lines occasionally. 

• Tip: Try to keep your credit utilization below 30%. 

Apply for Credit Building Products

If you're looking to build or rebuild your credit, several credit-building products are available to help. Secured credit cards and credit builder loans are two options that can help you improve your score relatively quickly with responsible use. 

Secured cards are credit cards that you pay a deposit for, which then become your credit line. Low credit profiles are often approved for these cards.  

Credit builder loans are small loans you take out, and as you pay, the lender sets your money aside in a savings account or CD. Once you’ve paid off the loan, you get the cash back to use as you wish. 

These products can help you establish a positive credit history and improve your credit score over time.

• Tip: Missing payments on a credit builder loan or secured credit card will hurt your credit score. 

Consider Adding Alternative Data to Your Credit Report

Suppose you have a limited credit history and don’t want to use a credit card or loan to start building credit. In that case, consider adding alternative data to your credit report, such as your rent and utility payments. There are companies that can help you do this. Including these payments can help supplement your credit history and potentially boost your credit score.

• Tip: You can sign up for Experian Boost to add rent, utilities, and streaming services to your credit report. 

Keep Your Oldest Accounts Open

Experience helps you get better jobs, learn from your mistakes, and improve your credit score. Once you’ve been using credit for years, you’ve (hopefully) established positive habits around your finances, and that shows on your credit report. 

• Tip: Even if you don’t use an older credit card, keep the account open as closing old accounts can lower the average length of your credit history. 

Apply for New Credit Sparingly 

While having a few reliable credit accounts can be beneficial for your credit score, applying for too much credit too quickly can have a negative impact on your score. To maintain a good credit score, apply for new credit sparingly and only when absolutely necessary.

• Tip: Only apply for new credit accounts when you need them and when your credit score is in a good place.  

Final Word

Understanding why your credit score went down or up can help you take the steps necessary to keep your credit score in good condition. To maintain a good score, you’ll need to make positive money moves such as paying your bills on time, reducing your credit card debt, keeping your credit utilization low, and applying for credit-building products. Additionally, regularly monitoring your credit report and score can help you catch any potential issues early and take steps to address them.

Remember, a good credit score can open up opportunities and make it easier to access credit and other financial products, so protecting and improving your credit score over time is a must.