(BPT) - There are a lot of misconceptions about credit scores, including how common credit behaviors could impact your credit score. In reality, your credit score changes all the time.
Your credit score can fluctuate for a number of reasons. For instance, it can fluctuate because new data is being reported while older data is slowly losing its predictive power as it ages. Even if you’re making smart money moves, here are a few surprising things that can impact your score:
Paying off installment loans early
The impact of paying loans off early is also dependent on a variety of factors. In some cases, paying off an installment loan early could boost your credit score. But in other cases, it causes your score to drop. If it drops, it’s typically because paying off an installment loan reduces the types of credit reported on your file. A healthy credit mix includes having both revolving credit (credit cards) and installment credit (car loans, student loans, personal loans and mortgages). Making consistent and timely payments on both helps you maintain a healthy score. But when you pay off your installment loan earlier than the intended repayment date, closing that account can hurt your score.
However, these dips are often temporary and paying off the debt will help you more financially in the long run.
Closing an unused credit card account
VantageScore credit scoring models take into account the debt utilization ratio, which is based on the amount of credit a consumer uses relative to the total amount of credit available. If you want to keep your credit score healthy, it's best to keep your credit utilization between 10% and 30%. For instance, let's say you have three credit cards. One card has a $2,000 limit, another has a $1,000 limit and the third also has a $1,000 limit. Suppose you have balances on the first two but cancel the third one because you haven’t used it. The ratio of your credit utilization will then increase, which can cause your credit score to decrease.
Adding new lines of credit
Internet, cable and landline providers typically run a credit check before starting your service. When you set these up, providers will typically do a background check on your credit, which is known as a hard inquiry. Other types of companies also do credit checks before making lending decisions. Such hard inquiries can lower your credit score. One way to minimize the impact of hard inquiries is to shop for the best rate and terms within a 14-day period. For VantageScore models, hard inquiries made within a 14-day period count as just one inquiry and as a result, your score won’t be harmed as a result of multiple hard inquiries.
Want to learn more about your credit utilization?
For those interested in learning more about their credit utilization, VantageScore can provide consumers with transparent and informative data about that as well as other items that can impact your VantageScore credit score.
Little credit hiccups like the ones discussed above may throw you off guard. But as long as you have your finances in order, these credit score drops are not necessarily something to worry about. Continue to maintain your healthy financial behaviors and the results should show as time passes.