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What Makes Your FICO Credit Score Change Each Month?


Did you know that your credit score is different day-by-day?

Many consumers believe that credit scores are assigned and do not change. The reality is that FICO scores are fluid. FICO credit scores are a snapshot of your credit record at the exact moment your credit report is pulled. Your scores, therefore, fluctuate as the information within in your credit report changes. From day-to-day and week-to-week, there are a number of factors which affect your FICO score.


Credit Checks and Inquiries


Will my FICO Scores drop if I apply for new credit? If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. However, most Credit Scores are not affected by multiple inquiries from Auto, MORTGAGE, or Student Loan lenders within a short period of time. Typically, these are treated as a SINGLE inquiry and will have little impact on your credit scores.

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What is an Inquiry?


When you apply for credit, you authorize those lenders to ask or "inquire" for a copy of your credit report from a credit bureau. The only inquiries that count toward your FICO Scores are the ones that result from your applications for new credit.


What Makes Up Your Credit Score?


FICO is a brand name and the FICO model for scoring credit was first developed by the Fair Isaac Company.

The FICO model is the dominant credit scoring model in use today. Because of its dominance, the term "FICO score" has become a generic one; similar to how we use the terms "Band-Aid' and "Kleenex" in everyday use.

A person's FICO score is meant to predict the likelihood of a mortgage loan going delinquent. High FICO scores correlate with a low default probability and low FICO scores correlate with a high default probability.

FICO credit scores take all of the information found in your credit report into account, in varying proportions.

Your FICO score is made up of the following:
• Payment History : 35%
• Total Amounts Owed : 30%
• Length of Credit History : 15%
• New Credit : 10%
• Type of Credit in Use : 10%

FICO scores can change daily because the way we use our credit changes daily. We make charges, we pay bills, and we open new cards. Understanding how your credit score can change is the first step to actively earn a higher score.


Keeping Credit Balances Low


Total amounts owed on your credit accounts for 30% of your FICO score. Therefore, when you make too much use of your available credit, you can lower your FICO credit score significantly.

As a general rule, keep each of your credit cards' balances below 20 percent of their available limits; and avoid maxing out your cards.

The FICO scoring model takes into account the utilization of each individual credit card account, as well as the utilization of all of your accounts combined. For example, if you use five credit cards, each with a $2,000 limit, you have access to $10,000 of available credit. If, on one card, you carry a $1,000 balance, that card would be at a 50% utilization -- which is bad. However, accounting for all cards, your total utilization is just 10% percent, which is not bad.

Therefore, instead of using one card and running it to its maximum, consider spreading your purchases over multiple cards instead. This will help you maintain a higher credit score.


Be Careful When Applying For New Cards


New credit accounts for 10% of your FICO score. Therefore, it's recommended that you apply for new credit cards only when it's needed; and, certainly not from each retailer offering a "special deal" at checkout in exchange for opening a store card. Regardless of whether you're approved for the new account, even asking for it can damage your score.

One or two credit applications may not harm your mortgage approval chances, but your lender may ask you to explain, in writing, why you sought new accounts.

Make more than one or two applications for credit, though, and you could be facing disastrous effects.

The FICO model treats consumers who actively seek credit as more of a risk than consumers who do not. The result is lower credit scores overall. Another consideration when trying to open a new account is that "New Credit" affects your FICO score, too.

The FICO model includes an evaluation of the age of your open credit accounts. The longer your accounts have been open overall, the better so when you open too many new accounts in too short of a time period, the average age of your open accounts falls.

According to FICO, most "FICO High Achievers" boast an average account age of 11 years or more.


Pay On-Time For Better FICO Scores


Payment history accounts for 35% of your FICO score. Therefore, it is vital that you make at least the minimum payment due for each of your credit accounts monthly.

Remember that the FICO scoring model evaluates your total number of credit accounts with delinquency as compared to your total number of accounts which are paid as agreed. It also considers the severity of your delinquencies; the time passed since your last delinquency; and, the presence of public records such as bankruptcy, judgments or liens.

Failing to make even one on-time payment can drop your FICO score dramatically -- a misstep which may take months or years from which to recover.

Paying bills promptly is not only your financial responsibility, but a financial priority as well -- especially considering how far your FICO score reaches into your personal and financial life.

Making minimum payments to all of your accounts is more important than making full payments to just one of them. Consider auto-bill pay options or other online payment options if you have trouble remembering to send payments via USPS.


Don't Close Old, Unused Credit Accounts


Although it may be counter-intuitive, closing your old accounts -- especially credit card accounts -- can have detrimental effects on your overall FICO score. This is because closing old accounts affects your total credit utilization as well as your average age of accounts.

To illustrate, consider your five credit cards, each with a $2,000 credit limit, which gives you $10,000 in total available credit. And, let's assume that you're carrying a $500 balance on each card. Overall, you have a 25% utilization on your cards, which is good.

Next, in the mail, you receive an offer to transfer your credit card balances for 0.0% APR and no fees whatsoever. You take that deal so, now, you have five cards with no balance plus one zero-percent APR card maxed out to $2,500.

You're saving money, and that's good. However, at this point, consumers tend to get excited about their low rates and, therefore, choose to close their other five higher-APR credit cards.

This is where trouble sets in.

Now, instead of a 25% utilization across five accounts, you have 100% utilization on one card which is brand-new. In the land of FICO scoring, this can be terrible.

In this scenario, it's best to leave those other credit accounts open as long as possible to avoid reducing your available credit, and to avoid damaging your utilization ratios.

Adam Shapiro GRI, Associate Broker, Weidel Realtors, New Hope PA, Licensed in PA & NJ

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