Rise And Fall Of Your Credit Score

The most important thing to remember is that your credit score will go up and down, but understanding your score can help you make smart choices. Focus more on trends and less on small fluctuations to avoid getting caught up in the exact number. Knowing what causes it to rise or fall can help you determine what actions to take to keep your credit in good standing and available when you need it.

Understanding Your Credit Score

A Credit Score is a three-digit number (ranging between 300 – 850) that is calculated using different factors of your borrowing history. In general, a credit score between 670 and 739 is considered good. Credit scores are used by lenders to determine if you will be approved for a loan or line of credit. A good credit score may get you more favorable terms such as a better interest rate.

The following are five factors that are considered in the calculation of your credit score. The first two (bill-paying history and how much of your available credit you are using) have the biggest impact on your credit score: 

1. Bill-paying history: This factor makes up the largest portion of your credit score. Lenders want to see that you can pay back your debts and pay them on time. What you can do: One of the best ways you can increase your credit score is to stay current on all your payments. Setting up alerts or auto pay can help make it easier.
2. How much of your available credit you are using: Keeping balances low demonstrates that you can manage the credit that is available to you. What you can do: If your balances are high, consider making extra payments. Keep your balances low by setting balance alerts.
3. The number and types of loan accounts you have: Having a good mix of installment loans (i.e., auto or personal loan) and revolving lines of credit (i.e., credit card or home equity line of credit) is a favorable indicator that you can manage different types of credit. What you can do: If you only have a credit card, consider an installment loan. A personal loan will carry a lower interest rate than a credit card and may be a good way to help pay down a balance that you are carrying on a high interest rate credit card.
4. How long you have had credit: The longer your credit history, the better. What you can do: If you have an unused credit card, make a small purchase, and pay it off, in full at the end of the billing cycle. Cards that are inactive after 12 months may be closed by the creditor, which can have a small (but negative) impact on your score.
5. New applications for credit: Applying for a loan or opening a new line of credit can cause a small drop in your credit score. What you can do: A new credit card may increase your available line of credit. The key, in this instance, is to keep your credit card balance low. With a new loan or credit card you may also be improving your mix of credit.

It is important to keep the bigger picture of your finances in mind. Taking on a loan with a lower interest rate may be part of your strategy to get out of debt. Accessing new credit may help you reach a goal. This may cause a change in your credit score, but it is okay. By getting into the habit of monitoring your credit score regularly, you can keep an eye on the number. When it fluctuates up or down, you will understand what is influencing the change and how to keep it strong.

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(October 2023)