Ask Stacy: Why Does My Credit Score Go Up and Down So Much?

If you monitor your credit score, you may be like this reader — scratching your head wondering why it changes so much.

Here’s this week’s reader question:

My Discover card started providing my credit score free each month. What I don’t understand is why it was 814 one month, then 794 the next and now it is 803. Nothing has changed in my life. I didn’t open up any new credit cards, my home has been paid off since 2004 and my car was paid off in 2007. I pay all my bills each month in full and on time. So why the fluctuation in my credit score?

While I have to tip my hat to Discover for doing what’s right — providing free credit scores — seeing your credit score too often, as well as from too many sources, can create confusion.

Let’s explore different credit scores, what makes them change and whether you should care.

What’s in your credit score

The credit score offered by Discover to its cardholders is the most widely used credit score, the FICO score. Here are the components FICO says go into that credit score:

• Payment history: 35 percent. Simply whether you’ve paid your bills on time.
• Level of debt: 30 percent. How much debt you have, how much you’ve borrowed relative to your limits, and a few other factors.
• Length of credit history: 15 percent. How long your accounts have been established
• Types of credit: 10 percent. The mix of credit you have, including revolving accounts, installment loans, mortgage loans, etc.
• Recent inquiries: 10 percent. Opening several accounts, which require inquiries, within a short period of time can lower your score.

Keep in mind that your credit score is based on your credit history, so anytime something changes in your history, your score can change as well. You’re entitled to one free credit report annually from each of the big three credit reporting agencies by visiting AnnualCreditReport.com.

I’m not changing — why is my credit score?

If I take several pictures of you in the course of an afternoon, would you look exactly the same in all of them? You’ll look basically the same, but there will be subtle differences. Your hair, your posture, your clothes — things are going to change that might slightly alter your appearance.

Your credit score is like that. It’s a snapshot, a picture of your credit taken at one second in time.

If you use credit cards, your balance is always changing. If the snapshot is taken before you pay your bill, you’ll show a balance. Immediately after, you won’t. If you have a mortgage or car loan, the principal drops every time you make a payment. With every passing month, the length of your credit history grows and negatives carry a little less weight.

In short, even when you’re standing still, your credit history isn’t. While the factors above suggest your credit score is a simple, static mix of five components, it’s computed using a complex, proprietary algorithm whose precise components and weighting are known only to FICO.

Should you care?

It’s natural to think that if we’ve done things perfectly for decades, we deserve a perfect credit score. Good logic, but perfect scores are exceedingly rare and no score will remain exactly the same for long.

That’s the bad news, but here’s the good. If you’re not going to apply for credit soon and have a consistently high score, don’t give it a second thought.

This reader, for example, cites three different scores over three months, ranging from a low of 794 to a high of 814. While that presents a cloudy picture to him, to a lender it’s crystal clear. He’s a rock star.

While the highest possible FICO score is 850, anything over 750 probably won’t bring any faster approvals or lower rates because that’s the minimum score that earns the best deal from most lenders. Anything above 750 is just bragging rights. And since more than half of Americans now have a 750-plus FICO score, it’s not worth bragging about.

When you should care about your credit score, however, is when you might be borrowing soon. If you’re at or near the magic 750 number, do everything possible to get comfortably above it, especially if you’re borrowing big, like for a mortgage. For tips on how to do that, see “7 Fast Ways to Raise Your Credit Score.”

Let’s make this more confusing

Our reader gets a free FICO score, easily the most popular credit score in the United States. But it isn’t the only credit score. Equifax has a score that ranges from 280 to 850. TransUnion’s Transrisk score ranges from 300 to 850. The VantageScore 3.0 score ranges from 300 to 850. The Experian PLUS score goes from 330 to 830.

Even your FICO score will differ based on which credit reporting agency — Experian, Equifax or TransUnion — issues it. And it gets worse: According to Consumer Reports, FICO serves up 49 different scores to lenders, but only two to consumers. So when you apply for a loan, it’s likely your lender will be looking at a score that’s different from the one you see.

Why are there so many credit scores? Because they’re a product developed and marketed to make money. Credit-reporting agencies want you to buy them. Websites like Credit Sesame, Credit.com, CreditKarma and Quizzle give them away to entice you to join their sites. Discover and other banks offer them to entice you to use their plastic.

In my opinion, when companies start hawking various scores by acting like inflatable arm-flailing tube men, they’re not doing anyone any favors.

Now let’s make it simple

If you pay your bills on time, all the time, for long periods of time, you probably have a great credit score. Unless you’re about to borrow, don’t obsess about it. There’s no prize for perfection.

You do need to check your credit history from time to time to make sure there are no mistakes and that it properly reflects your balances and payment history. And you certainly want to check your FICO score if you’re about to borrow.

But pay no mind to minor fluctuations, and for heaven’s sake don’t worry or become confused by the plethora of scores from companies handing them out like party favors.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

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