Credit scores are important when it comes to accessing different credit products such as personal loans, car loans, mortgages and credit cards. Healthy credit scores are also essential if you want to qualify for competitive interest rates and flexible terms that fit your financial needs.
Having good credit can also help you rent an apartment, get a job or even score lower insurance premiums. Given the importance of credit scores, it is important to understand how it can fluctuate.
What Are Credit Scores?
Credit scores are used by lenders and other third parties to assess your creditworthiness and likelihood to pay your bills on time. The higher your credit scores, the less risky you’ll seem as a borrower. Credit scores range between 300 to 900. Scores below 559are considered “poor” and scores above 659 are considered good to excellent.
How Are Credit Scores Calculated?
Credit scores are calculated using the information in your credit report. There are 5 common factors used to calculate your credit scores. However, the factors and weight each factor carries depends on the credit scoring model used.
- Payment History ~35%
- Debt To Credit Ratio ~30%
- Credit History ~ 15%
- Credit Inquiry ~10%
- Public Records ~ 10%
Credit Score Fluctuations And Credit Scoring Models
As mentioned, there are different credit scoring models, so depending on the one used, your credit scores can fluctuate. For example, your Equifax credit score and TransUnion credit score is likely different as they each have their own credit scoring model.
Moreover, when you apply for an auto loan or mortgage, the credit score used by these lenders may be specific to that industry. So one lender may put more emphasis on your payment history while another may put more emphasis on your credit history when calculating your score.
Credit Score Fluctuations And Credit Reports
Your credit scores can also fluctuate depending on the information in your credit reports. As mentioned, your credit scores are calculated using the information in your credit reports (TransUnion or Equifax). However, your two credit reports may not contain the exact same information as not all lenders and creditors report to both bureaus. In fact, some don’t report to the bureaus at all. As such, the discrepancy in your credit reports can lead to fluctuations in your credit scores.
Similarly, when your credit report is updated with new information, it too can cause your credit scores to fluctuate. New data may be reported to the credit bureaus by your lender, creditor and other third parties. New data may include account closures, payments, new accounts and other credit-related information.
Time And Credit Score Fluctuations
Your credit scores may also fluctuate simply due to the passage of time. For example, if you’ve made a late payment, its impact on your score may reduce as time passes by. Moreover, negative remarks are removed from your credit report after a certain period of time, this could potentially positively impact your credit.
How Do Your Credit Habits Affect Your Credit Scores?
All of your financial habits, the good ones, and the bad ones, can affect both your credit report and your credit scores. If you have any type of credit product, whether it’s a simple credit card or a long-term mortgage, it’s important that you understand how these credit products can affect your credit when you use them.
Carrying Too Much Debt
Your debt to credit ratio is a common factor used when calculating your credit. In general, it’s recommended that you keep a ratio of 30% or below. A higher ratio may negatively affect your credit scores.
Banks, lenders, and credit providers take into account how much debt a potential borrower has in order to determine their level of risk. The logic behind this is that if you already have too many credit payments to make at the same time, you may be financially unable to pay them all.
Serious Misuse Of Credit Cards
Irresponsible use of credit cards can seriously negatively impact your credit. You might be wondering what exactly “serious misuse” or what “irresponsible use” entails. Let’s take a look:
- Maxed out credit cards. You should avoid maxing out your credit cards whenever possible, as it will give future lenders the impression that you are unable to keep your spending under control. Moreover, it will increase your debt to credit ratio which may negatively impact your credit.
- Applying for too many credit cards within a short period of time. Every time you apply for credit, your potential creditor performs a credit check. This will show up as a hard inquiry on your credit report, which can lower your credit scores.
- Opening numerous accounts quickly. If you get approved for and open several new credit accounts quickly, you’ll be reducing the average age of your credit accounts, which accounts for around 15% of your credit scores.
- Missing credit card payments. Failing to make your credit card payments on time and in full can lead to high-interest charges and lower credit scores.
Closing Accounts
The age of your accounts can also impact your credit scores. Generally, the older your accounts are the better it is for your credit scores. As such, closing a credit account, particularly an old account can negatively impact your credit scores. In fact, closing a credit account can affect your credit in two ways:
- Lower credit account age – when you close an account, particularly an old account, it will decrease the average age of your credit accounts.
- Increases your credit utilization – When you close a line of credit or credit card account, you’ll be lowering your available credit limit, which in turn may increase your credit utilization ratio.
Consumer Proposal
Filing a consumer proposal in Canada may negatively impact your credit, but can be a helpful tool for those with serious debt issues.
A consumer proposal is a debt relief option that is less drastic than bankruptcy. It’s an agreement that’s struck between you and your creditors, negotiated by a Licensed Insolvency Trustee. You and your trustee will create a proposal that details what you can afford to repay. Your creditors can then either accept it or decline it.
As we mentioned before, within your credit report, each of your accounts is given a credit rating, R1 to R9. When an account is part of a consumer proposal, it will receive an R7 rating. The R7 rating will remain on your credit report for the time it takes you to complete your repayment plan, plus an additional 3 years.
Bankruptcy
When you file for bankruptcy in Canada, it will appear on your credit report which can severely negatively impact your credit scores. If you’re filing for bankruptcy for the first time, it will be visible on your credit report for 6 – 7 years after your debts are discharged. If you ever file a second bankruptcy, it will remain on your credit report for 14 years.
An R9 rating is the worst credit rating that an account can have. It means that the account has been sent to collections or is part of a bankruptcy filing. Once the 6-year period is up, this rating will no longer appear on your credit report.
Credit Score Fluctuations FAQs
Why is my credit score going down when I pay on time?
Why did my credit score drop when there were no changes on my credit report?
Will my credit scores fall every time I check it?
Bottom Line
Credit scores can fluctuate for a number of reasons, from the way you use your credit to the credit scoring model used, your credit score will vary. If you’re currently struggling with low credit because of past financial mistakes, you can still improve it. Generally, consistent and responsible usage of credit can lead to good credit.
