Your credit score is an important number, but it’s not fixed. It’s calculated using the information in your credit report and lets lenders know your level of risk as a borrower. However, it’s not uncommon to check your score and then get an entirely different score a month later.
What exactly goes into your credit score and what can make it can change so suddenly?
Why did my credit score drop?
It can be confusing when you think not much has changed with your financial habits and your credit score has dropped a few points. Here are a few common reasons why your credit score would drop:
- You applied for many credit cards at once. Some lenders may see this as being financially desperate. Keep in mind that you don’t need to have your application approved for it to be listed on your credit report. Any new applications you make for credit will directly affect your credit score.
- A credit provider reported new information to a credit agency. Credit providers don’t always immediately report information to credit reporting agencies. Newly reported information, which can include defaulted or delinquent accounts may be the cause of a random credit score drop.
- Your credit report has a mistake on it. Your credit report is what dictates your credit score, so if you find an error, take the necessary steps to correct the mistake on your credit report.
- You closed a credit card or loan. Your credit score will likely lose a few points if you close a credit card or loan because you’re cutting down your available credit regardless if you use it or not. This negatively impacts your credit utilization ratio.
- You made a late payment on a credit account. Your monthly payment information is listed on your credit report and can directly affect your credit score if you’re not making payments on time.
- You’ve made a big purchase. Purchases with high price tags are often bought with credit cards to give the borrower some flexibility for paying. If your purchase maxed out your card, your score will typically drop because you’ve used all of your available credit on that account.
- Your account was sent to collections. When you stop making payments and have a delinquency, the lender assumes that you’re likely trying to stick them with the bill. In this scenario, they’ll make attempts to contact you, and if unsuccessful they’ll list your account as default and send it to collections to recover the unpaid debt.
- Lowered credit limit. When you or a lender lowers your credit limit, your credit utilization ratio will rise and generally result in a slightly lower credit score.
Did you know?
It’s not just your credit activity that could have an impact on your credit score, you could see a slight change in either direction due to FICO constantly updating their scoring formula in order to assess borrowers in the most accurate way possible.
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Why did my credit score go up?
Due to the amount of information that’s used to calculate your credit score, it’s easy to see how your score can fluctuate. Here’s why you might see a bump upwards in your score:
- A negative listing is expired or old. Information is only held on your credit report for a certain length of time, so when a negative listing is removed from your credit report, your credit score should increase.
- You changed your credit limit. Requesting or receiving an increased limit on your credit card can positively impact your credit score because you have more available credit at your fingertips. However, you might see an initial drop because of the request, but if approved your score will typically shoot back up. Credit increase requests should be limited to every 2 to 3 years.
- Older accounts. The longer you’ve had a credit account, the better your score will be because the length of your credit history is always aging. The amount of time you’ve had your credit accounts open for represents about 15% of your credit score.
- Diversifying your credit. When you responsibly manage different types of accounts — home loan, personal loan and credit cards — it broadens the financial diversity of your credit history and may improve your score.
- Managing your credit. By making on time payments, paying your due balance in full each month and not irresponsibly using your credit, you’ll likely see your credit score go up — but be patient, it takes time.
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Must read: Will my credit score drop if I apply for a loan?
Your score will take a slight dip, but this is because the lender you’re applying for a loan with is pulling your credit report to assess your risk factor — this is known as a hard inquiry.
However, if you’re shopping around for a big loan and apply with multiple lenders to find the best rate, it will typically only count as one credit inquiry on your credit report if the inquiries were made between a 14 to 45 day window.
How often is my credit score updated?
Your credit score is updated monthly based off the data in your credit report.
It’s important to note that if a credit provider requests your credit report or credit score (or both) from a credit reporting agency, it will be calculated at the time of the request. So if a lender orders your credit score, it may have moved up or down from the last score you saw depending on your recent borrowing behavior.
What do lenders report to the credit bureaus?
The two major Canadian credit bureaus, Equifax and TransUnion, receive positive and negative information from lenders every month about millions of Canadians. However, not every credit provider reports to all of the credit reporting agencies — lenders pick and choose which and how many bureaus they report to.
Data reported to the credit bureaus are:
- Account activity. If your account is open and in good standing, closed, delinquent, default, charged off or sent to collections.
- Payment history. On time, late or missed payments. Late payments will be reported in days — 30, 60, 90, 120, 150 days late.
- Account balance. How much your current balance is compared to your credit limit — this is your credit utilization ratio.
- Credit inquires. Credit card and loan applications, requests to change your credit limit, or anything else that’s registers a hard pull of your credit will be reported.
- Authorized user activity. If you have an authorized user on your credit card account, any activity on the account from their usage will be reported on your credit report since you’re the account owner.
How to keep an eye on credit score fluctuations
Keeping a sharp eye on your credit report and score is the most effective way to know what’s going on with your creditworthiness. Although your credit score isn’t included on your credit report, you can get a free credit report from each of the credit bureaus once a year and inspect for errors or suspicious activity.
There’s also the option of paying for a credit monitoring service that alerts you whenever there’s any activity related to your credit report so you can know exactly what’s going on at all times. If needed, you can solicit the services of a credit repair agency to help you fix errors found on your report.
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There can a number of ingredients baked into the cake that is your credit score. When minor fluctuations happen, you shouldn’t worry too much, but if your score drops significantly, order your credit report to investigate the reason. Make sure you monitor your credit, be responsible with your payments, and be smart with your credit applications.
Learn more about your credit score here