Debthelper: The Mystery of Credit Scores

Q: Can you tell me why my credit score varies from month to month by as much as 20 points, even though there is little to no activity on my credit accounts? In the past four months it has gone from 777 to 767 to 787 to 772.

A: The mystery of the credit score --  the more I learn about it the more of a mystery it becomes. The only things I know for sure is that your FICO score is based mostly upon payment history, how long you have been a credit user, how many accounts you have open, what percentage of your available balances you are using and the types of credit you use. 

Yes, your credit score varies from month to month, and there is no escaping that. Having no activity on your credit cards may actually lower your score because you don’t have a current payment history. The best way to build a payment history is to use your credit cards every month and pay them off every month. If you carry a balance that could be detrimental to your score. 

 I have read articles off the Internet about trying to unlock the mystery behind the calculations that make up your FICO score. I once read that consumers are grouped into categories with those with similar credit. That is why someone with a bankruptcy can sometimes have a higher FICO score than someone who has never filed for bankruptcy. 

The reason is because consumers that have filed a bankruptcy are only compared to other consumers that have filed a bankruptcy. It didn’t make sense to me at all that someone with a bankruptcy on their record could have a better credit score than someone who has never filed a bankruptcy. 

Again, the more I learn about how the FICO score is calculated the more of a mystery it becomes. However, the guaranteed way to improve your score is to maintain a solid history of on time payments.  A qualified credit counselor can analyze your credit report, and provide you with insight on what you can do to improve your score.

There are some things that you would think actually raise your credit score that actually can make it plunge. For example, surprisingly, paying off an old debt actually lowers your score because it reopens the account. This is not to say that you shouldn’t pay off old accounts, but your score could take a temporary plunge when you decide to clean up your credit. Your credit score can also take a dip when you close any credit accounts or if you take out new credit accounts.  

If your credit is in the 700 range, that is a good score. No matter what your score is it is going to vary from month to month; that is just the way the FICO score works. If you have that little to no activity on your credit accounts that might be causing your credit score to drop. In that case, it may be beneficial to use the available credit you have, and make sure you pay it off when the bill comes. This will help you maintain credit activity and show that you make on time payments. 

Another thing to keep in mind is that there are three different major credit bureaus (Equifax, Experian, and Transunion) and it is possible your score is different with each company. That is actually a very common occurrence.  If you are interested in getting your credit analyzed, call up your local non-profit credit counseling agency and any certified counselor can help you. 
    

Jennifer Lane is a certified credit counselor and is taking questions I can answer in upcoming articles. Please feel free to e-mail your questions to me at jlane@debthelper.com.