5 Things to know about credit scores
Most people know that higher credit scores are desirable, but there are still misconceptions around those three-digit numbers, what they may mean, what impacts them and why credit scores from different providers may vary.
Credit scores are calculated based on information in your credit reports, reported to credit bureaus by lenders, collection agencies and other sources. As that information is updated, it may result in changes to your credit scores, depending on the credit scoring model used.
Here, we answer five questions regarding credit scores:
Q. Does closing a paid-off credit card account impact credit scores?
A. While it depends on your unique credit situation, consider the following:
Closing a credit card could lower the amount of overall credit you have versus the amount of credit you’re using (your debt to credit utilization ratio), which could negatively impact your credit scores. You can calculate your debt to credit utilization ratio by adding all your available credit and all the debt you owe on those accounts. Divide the total debt by the total available credit. Creditors and lenders often like to see a lower ratio of how much debt you have compared with how much available credit you have.
Closing a credit card account you’ve had for a long time may decrease the average age of accounts on your credit history, which is another factor generally used to calculate credit scores. It may also change the age of your oldest account. In general, creditors like to see you’ve been able to properly handle credit accounts over a period of time.
If you have a paid-off credit card you haven’t used in a certain period of time, it may be declared inactive and closed by the lender.
Q. Does having a perfect credit score matter?
A. While achieving a perfect credit score may seem enticing, any credit score within the “excellent” range will generally mean access to more competitive rates and terms.
Q. Why do your credit scores fluctuate?
A. There are several reasons why your credit scores may fluctuate or why they may vary depending on the credit bureau or company providing them. It’s important to know that fluctuation is normal when it comes to credit scores. Here are some of the reasons why this might happen:
Changing information. Credit scores are calculated based on information in your credit reports. That information is regularly updated as lenders and creditors, collection agencies and other sources report information to the two nationwide credit bureaus. The data could include balance changes reported monthly by lenders and creditors, the opening of new accounts, or payments on existing accounts.
Differences among credit bureaus. Some lenders and creditors report to both nationwide credit bureaus, while others may report to only one (or none at all). This means information used by the credit bureaus or by other companies to calculate your credit score may differ. In addition, there are different credit scoring models used by credit bureaus and companies to calculate credit scores.
Time. The passage of time may cause fluctuations in credit scores. For instance, if you made a late credit card payment, its effect on your credit scores may diminish as time passes. That doesn’t mean late payments are OK; it’s always best to pay on time, every time.
Payment history. Paying down balances on credit accounts can result in changing credit scores, as payment history is typically the most heavily weighted factor used to calculate credit scores, depending on the credit scoring model used.
Debt-to-credit ratio. Your debt-to-credit ratio is how much credit you are using compared to the total amount available to you (your credit limits). It is also one factor that may cause credit scores to increase or decrease. For instance, if your credit card balances change month to month, and the amount of available credit you’re using changes, your credit scores may change as well.
Different credit scoring models. There are a number of different credit scores available, and they may not be the same depending on the specific credit scoring model used. Some lenders may use credit scores that are specific to a certain industry – if you’re buying a vehicle, for instance, the credit scoring model the lender uses may weight your payment history on vehicle loans more heavily. These credit scores will differ based on the industry and are not the same as the credit scores you may receive from the two nationwide credit bureaus.
While increases and decreases in your credit scores are normal, it’s important to ensure the changes don’t result from inaccurate or incomplete information on your credit reports. It’s a good idea to regularly review your credit reports from the two major credit bureaus.
Q. Does every inquiry impact credit scores?
A. Simply put, an inquiry occurs when you or another company or individual requests access to your credit report. There are two types of inquiries: “hard” and “soft” inquiries.
Hard inquiries may negatively impact credit scores. These result from a company or individual checking your credit reports in response to your application for credit. Examples of hard inquiries would be those resulting from your application for a credit card, a vehicle loan or a mortgage.
One thing to know: If you’re shopping around for the best loan terms on a vehicle or mortgage loan, generally only one of those hard inquiries with a specified window of time will impact your credit scores. Depending on the credit scoring model used, the time period is typically 7 to 45 days. This exception doesn’t apply to credit cards, though – if you apply for multiple credit cards, each hard inquiry may impact credit scores.
“Soft” inquiries do not impact credit scores. Examples of soft inquiries might be you checking your own credit reports or an existing creditor reviewing your credit reports in connection with a periodic review of your account (known as “account review”).
Q. Does a good credit score guarantee you’ll get credit?
A. Not necessarily. While having a good credit history can be helpful in getting better loan terms, lenders and creditors use many factors to help decide whether to extend you credit and on what terms, and credit scores may be only one of them. Those factors may include information such as your income, your down payment, or the amount of the loan.