Maintaining a financially healthy life means staying alert and remaining informed on where your money is going. It also means regularly checking your credit score, making sure to utilize the three free credit reports per year you can access. But upon checking one, you may notice your score is lower than previous months'. This is not always cause for alarm. Be aware of these common reasons that your credit score may have dropped, many of which aren't exactly emergencies.
"Timely payment is the biggest single determinant of credit score."
Why scores drop, or why they don't rise
There are countless factors that go into every credit score, and even with the wealth of information available online, it's not always easy to figure out the specifics. Janna Herron at Bankrate stressed that obtaining the perfect credit score is no cakewalk, and finding the reasons why your score may have dipped isn't easy either. Even so, there are some common misconceptions about what actions actually impact your score. One persistent myth is the idea that paying balances early is preferable to just paying them on time. This mindset of "the earlier the better" makes sense on paper, but in reality, credit bureaus only care about consistently making payments by the due date. Paying early might just be more convenient for your financial situation, but it won't impact your credit score in any way. Timely payment is, however, the biggest determinant of score, so don't slack off on any bills.
The second-most important factor is utilization rate, according to Herron's sources at major credit bureaus. Utilization rate tracks what percentage of your credit card's limit is being used. The less it is used, the better. Herron cites a study by FICO as evidence to this point: consumers with a credit score over 750 typically only used about 7 percent of their available credit. This might be difficult to maintain if your credit limit is already low, so consider asking your credit card company to raise it. This may result in a better credit score over time.
Lower is (sometimes) better
If you've noticed your credit score taking a slight dive, don't hit the panic button without considering the details. Depending on your recent financial behavior, it may be entirely unavoidable, and probably something you can recover from quickly. Geoff Williams of U.S. News & World Report listed three common explanations for a credit score dip that are far from disastrous. One of the most common causes, and one that can potentially save money, is applying for multiple loans at the same time. Opening a credit card, applying for a car loan or other major financial moves will almost always incur a "hard inquiry" on your credit report, causing your score to lower. This is to ensure you aren't being irresponsible with credit. In several cases, this may be a great benefit. As in Williams' example, a car dealer may offer three different financing options for your new auto loan, each of which will require a hard inquiry. In the end, the slight drop in credit score from these reports is worth the money that can potentially be saved by knowing and utilizing the best options.
Staying on top of your credit
The best way to attain (and maintain) an optimal credit score is to be a smart consumer. Make sure you continue to pay off credit card and loan balances on time. Plan your spending wisely, especially with big purchases that will require a loan, such as a car or house. Spreading out the major buys will be reflected in a solid credit score, not to mention your bank account. Once you take ownership of your finances, the rewards will come. Keeping your credit score in check may seem like a chore, but it's one of the best ways to save money and make life a little less hectic.
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