Written by Dan Israeli from Fiona, in collaboration with MoneyLion
These days, consumers have relatively easy access to their credit scores thanks to a wealth of online services. Knowing your credit score is important, because it sets expectations for the type of financial products (e.g., credit cards, loans) that you’ll be best suited to apply for, and it factors into other important life needs (e.g., finding a job, buying/renting a home).
Knowing the weight that a credit score has, consumers are eager to maintain or increase their credit rating, especially if a major financial decision hangs in the balance. But how quickly (and often) does your credit score change?
Credit Score 101
For starters, it’s important to know how credit scores are generated. Creditors, whether it’s a loan lender or credit card issuer, send reports on account activity to the three major credit bureaus (Equifax, Experian, and TransUnion), which use the information, along with other personal financial data (e.g., medical bills, income) to create credit reports. The credit bureaus also use the data in those reports to calculate credit scores, which are based on two popular (and slightly differing) scoring models — FICO and VantageScore.
While both models differ in how they weigh certain data, as well as who they qualify for credit scoring, they both use the same factors for their calculation. To sum it up quickly, a credit score recipe is: payment history (35%), credit utilization ratio (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
While some of the factors above make sense to everyone, others may not. It’s important to have a good history of paying your bills on time and in full, as credit debt (and the missed and late payments that accompany it) weigh negatively on your report. Secondly, it’s not ideal to spend too much on a revolving credit account (e.g., a credit card), as doing so raises your credit utilization ratio and makes you seem too dependent on credit. Finally, it’s helpful to have a variety of credit accounts (cards and loans) but also important that you don’t apply for too many all at once.
Got all that? Being a responsible borrower or cardholder (or bill payer of any sort) can go a long way in enhancing your “creditworthiness,” which is the meal ticket to a high credit score. Now, how long until you see some results?
The Scores They Are a Changin’
The truth is, information in your credit report is constantly changing, more so based on the amount of credit activity you have going on. While creditors and other parties typically report to credit bureaus on a monthly basis, the specific day they send their data is not one and the same. As a result, a consumer’s credit report can change on a daily basis, even more than once in a day.
Since the information in your credit report is always changing, your credit score is constantly evolving too. Updates provided to a credit bureau may only cause an incremental change to your credit score, depending on the weight of the data. It’s important to know that for FICO, each credit bureau has a unique model for determining the score. For VantageScore, however, each bureau uses the same model. This is because VantageScore is a joint venture between Equifax, Experian, and TransUnion.
Based on the universal calculation listed above, paying your account on time and in full can have the biggest impact on your score going up, while keeping a low revolving credit balance can have the second biggest impact. As a result, negative account activity, in the form of delinquent payments, will likely cause your score to noticeably drop. Worse than that, an account that goes into default will likely drop your score even lower. Even worse is declaring bankruptcy, which will stay on your credit report for seven to 10 years.
What Your Score Can Do For You
It’s pretty simple (more so in theory than practice), but responsible financial behavior will do wonders for your credit score. Also, the longer you’ve established a history of paying your bills on time and keeping your spending in check, the better it can reflect on your credit report. Doing the opposite of all of the above can have a negative impact on your credit, and can cause a precipitous drop in your score, especially if your delinquent payments turn into defaults.
While having a strong credit score will help when applying for a job or trying to secure a home, it can also enhance your options for financial products, like a personal loan. Creditworthiness is a big boon for borrowers and appealing to lenders, and will increase your chance of getting loan offers with low interest rates, flexible terms, and more.
Start Building Your Credit Today
MoneyLion offers a proven credit-building program that lets you borrow up to $1,000 at a competitive rate while building credit, thanks to monthly reporting to all three credit bureaus and weekly credit tracking updates, so you always know your score. It’s called Credit Builder Plus, and there’s no credit check to apply. MoneyLion believes in helping as many people as possible access cash for near-term needs while building credit over time. Learn more here.