Why Does My FICO® Score Fluctuate?

Why Does My FICO® Score Fluctuate?

by | May 6, 2024

A FICO® Score fluctuates due to various factors, reflecting changes in an individual’s credit behavior and financial circumstances. These scores are widely utilized by lenders to assess the risk associated with extending credit or loans to consumers. By evaluating factors such as payment history, credit utilization, length of credit history, new credit inquiries, and credit mix, FICO® Scores offer insight into an individual’s financial habits and their ability to manage credit responsibly.

As a cornerstone of financial health, understanding FICO® Scores is paramount for individuals seeking to navigate the complexities of borrowing, lending, and maintaining a strong financial standing.

What Is a FICO® Score?

A FICO® Score is a numerical representation of an individual’s creditworthiness, commonly used by lenders to assess the risk of lending money or extending credit. It is based on information from credit reports compiled by the major credit bureaus – Experian®, TransUnion®, and Equifax®.

FICO® Scores typically range from 300 to 850, with higher scores indicating better creditworthiness. These scores are calculated using complex algorithms that consider factors such as payment history, credit utilization, length of credit history, new credit inquiries, and credit mix.

Why Does My FICO® Score Fluctuate?

Your FICO® Score can fluctuate due to various factors, including changes in your credit behavior and financial circumstances. Factors such as missed or late payments, changes in credit utilization (the amount of credit you’re using compared to your total credit limit), opening or closing accounts, applying for new credit, and changes in the length of your credit history can all impact your score.

Additionally, updates to your credit report, such as inaccuracies being corrected or accounts being reported differently, can also cause fluctuations in your FICO® Score. Understanding the factors that make up your FICO® Score and managing your credit responsibly can help minimize fluctuations and maintain a healthy credit score.

1. Payment History

Your FICO® Score fluctuates due to payment history because it’s one of the most significant factors in determining your creditworthiness. Payment history accounts for about 35% of your FICO® Score, making it crucial to maintain a positive track record of on-time payments. If you miss a payment or make a late payment, it can have a negative impact on your score. However, consistently making timely payments can help build your score over time.

Changes in your payment history, such as missed or late payments, can be reflected in your credit report and subsequently affect your FICO® Score. Therefore, fluctuations in your FICO® Score due to payment history are directly tied to your ability to manage your debts responsibly and meet your financial obligations punctually.

2. Credit Utilization

Your FICO® Score fluctuates due to credit utilization because it’s a key factor in determining your creditworthiness. Credit utilization refers to the amount of credit you’re using compared to your total available credit limit, and it accounts for about 30% of your FICO® Score.

When you use a higher percentage of your available credit, it can indicate to lenders that you may be overextended financially, which can negatively impact your score. If your credit utilization increases, such as by maxing out a credit card or carrying high balances on multiple cards, it can cause your FICO® Score to decrease. On the other hand, lowering your credit utilization by paying down balances or increasing your credit limits can help you reach your credit goals.

Fluctuations in your FICO® Score due to credit utilization reflect changes in your borrowing habits and how responsibly you manage your available credit.

3. New Credit

Applying for new credit and planning credit application strategies can cause fluctuations in your FICO® Score due to changes in your credit profile.

Hard inquiries on your credit report are typically performed by lenders. These inquiries are recorded and can temporarily lower your FICO® Score. Multiple hard inquiries within a short period can signal to lenders that you may be seeking credit urgently, which can be seen as a risk factor.

Opening new accounts can also affect your credit score. This can decrease the average age of your credit accounts, which may lower your score initially. Additionally, if you have a limited credit history or a thin credit file, adding new accounts can impact your score more significantly.

Spacing out credit applications over time can help reduce the number of hard inquiries within a short period, mitigating the temporary score decrease. Being intentional with your financial goals can allow you to have less fluctuation in your score.

4. Closed Accounts

Closed accounts may remain on your credit report for seven to 10 years, which can help or negatively impact your credit over that period of time depending upon how the account was managed when open. When an account is closed, it affects two key components of a FICO® Score, the credit utilization ratio and the average age of accounts.

Positive payment history has the potential to benefit your score by contributing to factors such as payment history, length of credit history, credit mix, and overall creditworthiness. It highlights responsible behavior and can help maintain or establish your credit score over time.

It is essential to address outstanding balances promptly in order to help minimize the negative impact on your credit score and financial health.

5. Inaccuracies

Regular credit checks are crucial for identifying and correcting inaccuracies in your credit report. Inaccurate information, such as accounts you don’t recognize or inaccurate payment history, can negatively impact your credit score and affect your ability to access credit or obtain favorable terms on loans and mortgages. You can help detect identity theft or fraudulent activity early when consistently checking your credit score.

If you find inaccuracies on your credit report, you have the right to dispute them with the credit bureaus. Regularly monitoring your credit report enables you to identify inaccuracies promptly and take steps to correct them. This may involve submitting documentation or evidence to support your dispute and working with the credit bureaus to investigate and resolve them.

6. Score Model Updates

FICO® periodically updates its scoring models to enhance accuracy and reflect changes in consumer credit behavior and lending practices. These updates aim to provide lenders with more precise assessments of credit risk and help consumers better understand their creditworthiness.

Regardless of these changes, it is crucial for consumers to focus on responsible credit habits rather than model updates.

7. Scorecard Changes

FICO® Scores are generated using multiple scorecards. FICO® periodically updates its scoring models, so these updates may result in changes to how certain factors are weighted or evaluated in determining a person’s credit score.

This situation occurs when an individual’s credit profile shifts in a way that causes them to move into a different scorecard within the FICO® Scoring model. Each scorecard represents a specific set of criteria used to assess credit risk, and moving from one scorecard to another can lead to fluctuations in the credit score.

For example, if FICO® updates its scoring model to give more weight to factors such as credit utilization or payment history, individuals whose credit profiles align more closely with these criteria may see an increase in their scores, while others may experience a decrease if their profiles no longer meet the criteria as strongly.

Scorecard changes can sometimes lead to confusion or frustration for consumers, as their credit scores may change even if their financial behavior remains consistent. However, it’s important to understand that these changes are usually based on improvements to the scoring model designed to provide more accurate assessments of credit risk.

FAQs About FICO® Score Fluctuations

How can I monitor my FICO® Score?

MyScoreIQ offers credit monitoring services that monitor your FICO® Scores and allow you to stay on top of changes to your credit report.

What’s the difference between small and large FICO® Score fluctuations?

Small FICO® Score fluctuations typically refer to minor changes in your score, usually within a narrow range of points. These minor fluctuations can result from factors such as minor credit utilization changes, payment history, or slight changes in credit inquiries. These fluctuations are common and often reflect normal variations in credit behavior.

Large FICO® Score fluctuations involve more significant changes in your FICO® Score, often exceeding 20 points or more. These fluctuations can be caused by significant events such as missed payments, high credit card balances, opening or closing multiple accounts, or applying for several new lines of credit within a short period. Large fluctuations may indicate more substantial shifts in credit behavior or financial circumstances, potentially impacting your creditworthiness and lending decisions.

What can I do to minimize fluctuations?

To minimize FICO® Score fluctuations, consider implementing the following actions and practice responsible credit management:

  1. Pay bills on time
  2. Keep credit utilization low
  3. Limit credit applications
  4. Manage credit mix
  5. Monitor credit reports
  6. Keep old accounts open
  7. Be strategic with closing accounts
  8. Limit credit card balances

What should I do if I see a large drop in my FICO® Score?

If you notice a large drop in your FICO® Score, take the following steps to address the issue:

  1. Review your credit report.
  2. Identify changes.
  3. Address immediate concerns.
  4. Develop a plan to reach your credit goals over time.
  5. Monitor your credit and seek professional help.

Taking these proactive measures, you can work towards improving your creditworthiness and achieving a higher credit score over time.

Bottom Line

A FICO® Score fluctuates due to a multitude of factors influenced by an individual’s credit behavior and financial circumstances. From payment history and credit utilization to new credit inquiries and credit mix, various elements contribute to the dynamic nature of a FICO® Score. These fluctuations reflect changes in credit management, financial habits, and external factors impacting one’s creditworthiness.

Understanding the dynamics behind FICO® Score fluctuations can empower individuals to make informed decisions, adopt responsible credit management practices, and take proactive steps to maintain or establish their credit profiles over time.

By monitoring their credit with MyScoreIQ, addressing inaccuracies promptly, and practicing prudent financial habits, individuals can navigate FICO® Score fluctuations effectively and work towards achieving their long-term financial goals.

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*Source: Fair Isaac Corporation.

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