I read somewhere some time ago that working on improving a poor credit score is a lot like growing out a bad haircut! Regardless of how often you go in front of the mirror, your hair are going to take their own sweet time! And a month can make a lot of difference! The same is applicable to your FICO (Fair Issac and Company) credit score. Although it may come as a surprise, your FICO score also fluctuates from month to month! Want to know why?!
Here are the exact reasons:
Your FICO credit score can improve significantly (over a period of time) with the various credit accounts (on your credit report) ageing with time. Please note that the FICO scoring model doesn’t just consider your oldest credit account, but also gives a fair amount of significance to the average age of all your credit accounts collectively. Although this ageing factor may not be a major impact on your month-to-month credit score figures, it can definitely impact your credit score over a period of time, let’s say in six months to one year.
Fluctuating revolving credit balances
Your credit score can change every time a fluctuation happens in your revolving credit balances. To give you an example, credit card balances which are revolving in nature usually change from month-to-month, after you make your bill payments. This change occurs regardless of you paying the card balance in full or not. The utilization of your cards also goes up with corresponding raises in your revolving credit card balances.
Credit card utilization ratio can be arrived at by dividing the total amount owed on a credit card by the total credit limit available on that card. So, if you’re carrying a $ 3000 balance on a credit card with $ 10,000 credit limit, your credit utilization ratio would be ($ 3000 / $ 10,000) x 100 = 30%.
The FICO scoring model takes into account the credit utilization ratio both on per card basis as well as collectively. The lower this ratio is, the better will be your credit score. Ideally, you should aim at keeping your credit utilization ratio below 30%.
An important thing to note here is that the credit card revolving balances may change from month-to-month and hence your card utilization may also change accordingly. Since utilization plays a significant role in determination of your FICO score, it may also change every month accordingly.
FICO formula alterations
The formula used in arriving at FICO score is changed periodically. FICO is constantly engaged in improving its credit scoring formula to make it more usable for the lending establishments. The whole idea is to make it as accurate an indicator of a person’s credit risk factor as possible. The same is applicable to all non-FICO credit formulae too. Hence, with the constantly evolving FICO formula, the lending establishments can use multiple versions of this formula depending on their needs. So, every time the FICO formula undergoes a change, it may lead to a corresponding change in your credit score too.
Ageing of the negative items featured on your credit report
Things like payment defaults, foreclosures, bankruptcy etc. featured on your credit report are all negative items that have a major impact on your credit score. Such items can stay on your file for a good number of years. To give you an example, any loan-related late payments can stay on your credit file for as long as seven years. With each one of these events ageing with time, and moving into the realm of the past, their impact on your credit score also diminishes accordingly. Resultantly, everything else being equal, your credit score may get better as these negative items age.
Application for new credit
It is normal for credit score to drop whenever you apply for a new credit. However, in general, inquiries don’t have a major impact on the FICO credit scoring formula.
Being late in making payments
By far the most frequently observed and critical factor responsible for FICO/credit score fluctuations every month is making late credit card or loan payments. Even having just one late payment incident can have a major impact on your FICO score. Furthermore, such late payments can stay glued to your credit file for as long as seven years.
Score card hopping
Another major reason why you may see your FICO credit score fluctuating in any given month is you getting placed in a new score card. This phenomenon is referred to as score card hopping and it occurs whenever FICO places a certain consumer in a different score card. Please note, FICO never evaluates all consumers the same way and doesn’t ever put them in the same category. It has different score cards for different consumer types.
Although FICO is very secretive about its score cards, one of them which a large majority of experts believe in is to do with people who’ve gone bankrupt at least once in their lives. Such score cards allow FICO to make correct risk evaluations of consumers situated similarly. Furthermore, your final credit or FICO score depends on the exact score card you belong to.
Score card hopping is said to occur whenever FICO shifts a particular consumer from one score card to another. For instance, if a consumer having bankruptcy on his/her credit file is freed from such blot, he/she is most likely to be moved from the bankruptcy score card to another one. However, it is interesting to note that your credit score may actually drop despite getting moved to a better score card, as a direct result of that change! This is because now you’re in a category where you’re competing against an altogether new set of consumers. Although you may have fared pretty well against the ones who had filed for bankruptcy, after hopping the score card, you’ll be pitted against an entirely different group. Although such score card hopping can have a good long-term impact on your FICO score, it may lower rate in the short-term.