7 Things That Cause Your Credit Score To Fluctuate From Month To Month – The Dough Roller

Have you ever paid off a debt only to find that it caused your credit score to plummet?

Paying down debt is absolutely a good thing. But why would that lead to a lower credit rating? It can be very frustrating, if you’re watching your score from month to month, to pay off a loan and see the score drop 22 points.

Also, while the folks at FICO give us a lot of information about how they calculate credit scores, the actual formula remains a trade secret. We take a closer look at why your score changes.

8 Reasons Your FICO Score Changes Month-to-Month

1. Aging Negative Items in Your Credit Report

Events such as bankruptcy, foreclosure, or late payments are examples of negative things that affect your credit score. These events remain on a credit report for several years. A late payment, for example, stays on file for about seven years. However, as these events age, the effect they have on your credit score diminishes. As a result, your score may increase.

2. Changes to revolving credit balances

Changes in revolving credit balances can cause credit scores to fluctuate. Credit card balances, for example, can change from month to month as you use your card.

A credit utilization rate is calculated by dividing the amount of your debt on a credit card by your credit limit. For example, suppose you have a credit card with a balance of $5,000 and a limit of $10,000. So $5,000 divided by $10,000 is 0.5, which means you would have 50% utilization.

FICO reviews the ratio both on an account-by-account basis and on an aggregate basis. The lower the usage, the better. According to FICO’s Tom Quinn, it’s best to aim for no more than 20-30% utilization. Learn more from Tom in his interview on the DoughRoller podcast.

Again, keep in mind that these rolling balances may change from month to month. Therefore, your ratio also changes. If it exceeds a threshold that FICO deems important, your score could drop. If it goes down and crosses a threshold that FICO deems important, your score could go up.

3. Age of accounts in your credit history

As your credit history and accounts age, your score may improve. FICO not only looks at your oldest account, but also the average age of your accounts. Scores may increase when accounts cross an age threshold that FICO deems important.

4. Changes to the FICO formula

FICO periodically changes its formula. FICO is continually trying to improve its formula to make it a more accurate indicator of credit risk. The same goes for non-FICO credit scoring formulas. The result is that multiple versions of the FICO formula are used at any one time. When a new version is applied to your case, it may change your score.

Related: A rare glimpse into the FICO credit score formula

5. Apply for new credit

Applying for credit could lower your credit score. Generally, however, inquiries are not a major factor in the FICO® formula.

Related: The bottom line that credit inquiries have on you

6. Dash Jump

Another explanation for changes in a credit rating is getting a new score card. Called a dashboard jump, this occurs when FICO places a consumer in a new dashboard. FICO doesn’t just lump all consumers into the same pot and rate us all the same.

FICO provides very little information on its dashboards. One factor, however, concerns those who have a bankruptcy on their record. Dashboards allow FICO to assess the risk of consumers in a similar situation.

Dashboard jumping occurs when FICO moves a consumer from one dashboard to another. For example, if bankruptcy is removed from a consumer’s credit report, they will be moved from the bankruptcy scorecard to another scorecard. What’s interesting here is that even though you may be moved to a better score card, your credit score may go down.

Why? Because you are now compared to a different group of consumers. You may have done well compared to others who have filed for bankruptcy. After the dashboard jump, however, you now find yourself with a very different group of consumers. In the long term, the change should help, but in the short term, it may lower your score.

7. Late Payments

This is the most critical causative factor for credit rating fluctuation. Even one 30-day overdue payment can dramatically affect your credit score. A late payment stays on your file for up to seven years. Even if you do everything else correctly, one late payment can negatively impact your credit score.

Related: How Late Payments Really Affect Your Credit Score

8. Why did my FICO score drop after paying off my debt?

This factor seems unintuitive at first glance, but it is true that your credit score can drop after you have fully paid off certain debts.

A credit score is calculated using a complicated formula. Unfortunately, this score is sometimes negatively affected in unexpected ways, and repayment of loans can sometimes cause this formula to change negatively.

For example, if you have paid off your only installment loan, this may negatively affect your score. This is because creditors prefer someone who can handle a diverse range of debts, also known as having a favorable credit mix.

Repaying your loan may also have had a negative impact on your credit ratio. For example, if you have fully paid off a credit card with a favorable utilization rate, you may only be left with credit cards with a less favorable utilization rate. The effect is to increase this ratio overall.

You may also have paid off an older source of debt, which would adversely affect the average age of your accounts. Creditors prefer to see that you can manage your debts for a long time. As a result, refunding this account may negatively impact your score.

3 tips to monitor your credit score

1. Make sure to check your credit report

You can get your credit report for free at annualcreditreport.com. You will receive your report from each of the three major credit bureaus for free once a year. Check for errors. Misinformation can lower your score unexpectedly. It happens all the time.

2. Use free services to understand what helps or hurts your score

The second thing you can do is use services that provide so-called educational scores. These scores are not calculated using the FICO formula, but using a variety of other credit scoring formulas. These services do a great job of telling you about your credit score. You can see what’s hurting your score and what’s improving your credit score, so you can figure out what you need to improve.

Two services I can recommend are Credit Karma and Experian. They are both free. You don’t need a credit card. I have used them all and they are very easy to use.

3. Monitor your FICO score

If you’re buying or refinancing a home, you might want to see your FICO score. Just go to myFICO. There are costs involved but it is not particularly expensive. They have a credit monitoring service that you can continue to use every month.

3 tips for building a better credit score

Of course, it’s not just about monitoring your credit score. You’ll also want to make active efforts to increase your score over time. Before we wrap up, we’ll look at the most important things you can do to boost your credit score over time.

1. Pay your debts on time

On-time payments are the biggest factor affecting your credit score. Paying your bills on time causes most people’s credit scores to fluctuate. A single missed payment can remain on your credit report for up to seven years.

We recommend that you provide a consistent timeframe to meet these obligations. Set aside a day that works for you each month and focus on paying off all your debts. This ensures that paying bills/debts becomes a habit, reducing the likelihood of you missing a payment. It also makes the process easier because you can do it all at once.

Related: How to get out of debt

2. Keep your credit utilization ratio below 30%

This is calculated as the percentage of the credit limit you are using. Creditors want to see a low utilization rate, preferably less than 30% of your available credit. Know the limits of each credit card and be aware of how much you spend (check regularly). The more you exceed 30%, the more your credit score will tend to drop. It is important to stick to these spending limits over time.

3. Use only the credit you can afford

This may seem like an obvious factor, but it is no less important. You need to reframe your understanding of credit as a payment you will need to make shortly. In other words, don’t use credit if you’re unsure of your ability to repay it. The more sources of credit you take on, the less likely you are to meet all of these obligations. We don’t recommend anyone take more than three credit cards and be sure to rotate usage so that each card’s usage rate doesn’t suffer. Of course (and most importantly) make sure to pay off your credit card every month.

Related: 11 easy ways to improve your credit score today

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Experian Boost Disclaimer– Results may vary. Some may not see an improvement in scores or approval ratings. Not all lenders use Experian credit reports, and not all lenders use scores impacted by Experian Boost.