Q&A: Why credit scores drop suddenly

Dear Liz: The same thing happened to me as to the person in your column whose credit score dropped more than 100 points after large purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable gift by credit card. After an appeal, I was able to get the credit limit on the credit card we use the most increased, and I’m waiting to see if that prevents the credit score from dropping going forward. I did check our credit reports and there were no missed payments or other problems.

Answer: Credit scores can drop when you use a lot of your available credit, but a 100-plus-point drop is unusual and should be investigated. You’re smart to look for ways to mitigate the damage from high usage. Asking to have credit limits increased is one way; another is making a payment before the statement closing date. The balance on that closing date is what’s generally reported to the credit bureaus, and thus what’s factored into your scores. Just remember to pay off any remaining balance before the due date.

Q&A: How a new credit card can help your credit score

Dear Liz: I’ve received a notice stating that a retail credit card I’ve had for more than a decade will be converted to a Mastercard. I already have an American Express charge card and a Visa rewards credit card. I don’t need another credit card. But I’m concerned. Will the conversion hurt my credit scores? Or is having a credit card versus a retail card better for my credit scores?

Answer: Congratulations! Such conversions indicate you’ve been using the card and your other credit accounts responsibly. If you continue to do so, the new credit card could help your credit scores more than the retail card.

Although getting new plastic is both good and bad for your credit score, a credit card is typically factored into more FICO scoring variables than a retail card, said Ethan Dornhelm, FICO’s vice president of scores and predictive analytics.

“So to the extent that you have positive behaviors, it’s more likely to have a broader positive impact,” Dornhelm said.

The flip side is that if you mess up by missing a payment or running up big balances, those mistakes could have a greater effect on your scores, Dornhelm said.

Closing the account probably would be one of those mistakes, since closures reduce your available credit and in general should be avoided unless there’s a compelling reason, such as a too-high annual fee. The benefits that came with the retail card, such as discounts and free shipping, probably will transfer to the credit card, so you can continue to benefit from the account without worrying that it will hurt your scores.

Q&A: Don’t bother with max credit score

Dear Liz: I am seeking your advice on how to maximize my credit score. Recently one of my cards was canceled for non-use, which reduced my available credit to $75,000. I use three other cards in rotation, never use more than 3% of my credit limits and always pay the balances off. I have made a few requests to have my credit limits increased in order to elevate my current 835 FICO score, only to be denied. I want to maintain as high a FICO score as possible (850). In order to do that I need to “play the game” … only I have no idea what the rules are! Could you please help me navigate this?

Answer: There is absolutely no practical benefit to having the highest possible credit score. You’ll get the best rates and terms once your scores are above the mid-700s on a 300-to-850 scale.

Regular readers can recite this next part by heart: Keep in mind that you don’t have one credit score. You have many, and they change all the time.

Even if you did hit 850 with one scoring formula from one credit bureau, you probably wouldn’t keep it for long or achieve the same number with all the other available scores.

You already know the most important credit rules: Use your cards regularly but lightly and pay your balances on time and in full every month. (Credit scoring formulas typically don’t “know” if you’re carrying a balance, so there’s no advantage in doing so.)

If you’re determined to hit 850, however, you could try using even less of your credit limit, applying for a new card to increase your available credit (the initial small ding to your scores would be short-lived) or simply waiting, since often the mere passage of time will add points to your scores.

Q&A: When a lower credit score might not be cause for alarm

Dear Liz: I sold my house, paid off my mortgage and then got a new mortgage for another home in 2021. When I applied for the new mortgage, my credit score was 830. After buying the home, my score dropped to the low 700s. It’s gone up only 2 points in seven months. I have no other debt. What’s going on?

Answer: Remember, you don’t have one credit score, you have many. When you applied for a mortgage, you typically would be shown three older-generation FICO scores — one from each of the three major credit bureaus (Equifax, Experian and TransUnion). Your interest rate would have been based on the middle number. If your scores were 840, 830 and 700, for example, your rate would be based on 830. Any score over 740 typically gets the best rate and terms on a mortgage, all else being equal.

The score you’re monitoring now was probably created from a different scoring model. If the score is a FICO score, it probably was created from an updated formula such as FICO 8 or FICO 9. It’s also possible that you’re viewing a VantageScore 3.0 or 4.0. VantageScore is a FICO competitor.

If you’ve been monitoring the same score all along and it actually dropped 100 points since your application, then something else is going on. Please check your credit reports from all three bureaus and look for a skipped payment, a collection or some other serious problem.

Q&A: How to boost your credit scores in the next year

Dear Liz: I am 36 with a 535 credit score and about to move back to the U.S. from Colombia with my future wife. I’d like to increase my score by 100 or 200 points within eight to 12 months. Is it possible?

Answer: Increasing your credit scores to the mid-600s within a year or so is probably a reasonable goal.

Most consumer credit scores are on a 300-to-850 range. The higher your scores, the easier it will be to get approved for loans and credit cards, plus you’ll be offered better rates and terms.

What’s considered a good or bad score depends on the lender and the scoring formula. In general, scores below 630 or so are considered bad while scores in the mid-600s are usually considered “fair.” Good scores typically begin around 690.

Consider a credit builder loan from a credit union or online lender. The money you borrow is placed in a certificate of deposit or a savings account for you to claim after you’ve made 12 on-time payments. You’ll pay interest to the lender but be building your savings at the same time.

Secured credit cards are another way to build credit. You deposit a certain amount with the issuing bank, often $200 to $2,000, and get a credit line in the same amount. If you use the charge lightly and pay it off in full each month, you can build credit without paying interest.

Q&A: Here’s why you have many different credit scores

Dear Liz: Have you ever covered the fact that the credit score that a person receives from the reporting agencies is entirely different from the one provided to lenders? The difference I discovered was 819 vs. 710. I’m a retired lawyer who represented investors in securities arbitration for 20 years, so not easily shocked or surprised by financial fraud, but I was.

Answer: The fact that there are many different scoring formulas has come up frequently in this column. What you consider to be fraud is actually a manifestation of capitalism.

Credit bureaus are private, competing companies. So are the creators of scoring formulas. Lenders and other companies that use credit scores have many to choose from.

FICO is the leading credit scoring formula, but rival VantageScore has gained market share in recent years.

Both types of scores come in multiple versions. The latest version of the FICO is the FICO 10, although the FICO 8 continues to be the most-used score.

Meanwhile, mortgage lenders tend to use much older versions of the FICO formula. Scores also can be tweaked for different types of lending, such as auto loans or credit cards.

Credit bureaus have created their own proprietary scores, as well. What this means is that the same underlying data — what’s in your credit report at a given credit bureau — can create significantly different FICO scores, depending on which FICO formula was used.

Even the same type of score, such as a FICO 8, could vary depending on which credit bureau’s information was used and when the score was “pulled” or created. The credit bureaus typically don’t share information with one another. Plus the information in your credit reports is constantly changing as information is added or deleted.

So it isn’t shocking that the score your lender used was different from the one the credit bureau provided you. What would have been surprising is if the number had been the same.

Q&A: Unexpected credit upswing

Dear Liz: I know there are different factors involved, but I find a recent upsurge in my FICO score inexplicable. My score went from about 740 to 815, according to a note in my most recent credit card statement. Yet I’ve done virtually nothing in the way of major credit activity — no purchases, no change in my already-low credit card use. I transferred about $800 from one card to another, and that’s it. If such small matters can affect the FICO score, it makes that score seem ridiculous. Can you offer any possible explanations?

Answer: Credit scoring formulas are a bit of a black box, but they are sensitive to how much of your available credit you’re using.

If you transferred the balance from a card with a very low credit limit to one with a higher limit, your scores typically would improve — although perhaps not as dramatically as the increase you’re describing.

Your scores might also improve if your balances dropped on other accounts or something that was negatively impacting your credit “fell off” or stopped being reported. The simple passage of time can improve your scores, as well, increasing the age of your credit accounts and the time since your last application for credit.

It’s impossible to say exactly what combination of factors may have affected the score you saw, but at least it moved in the right direction.

Q&A: When mortgage shopping, does checking your credit scores lower them?

Dear Liz: We’re trying to refinance a mortgage. All of the mortgage lenders claim that checking our credit scores will not affect the scores. However, that is not true. What gives? The three credit bureaus all list “too many inquiries” and penalize us. Does calling them do any good or make it even worse?

Answer:
Checking your own scores is considered a soft inquiry that has no effect on your scores. When a lender checks your scores, there can be a small ding, but credit scoring formulas also have a feature that reduces the effect when you’re shopping for a mortgage.

Essentially, all the mortgage inquiries made within a certain amount of time are grouped together and counted as one. In addition, the formulas ignore any mortgage inquiries made within the previous 30 days. The amount of time you can shop varies with the credit scoring formula, so it’s generally a good idea to concentrate your shopping into a two-week period.

What you don’t want to do when you’re in the market for a mortgage is to apply for other credit. Those inquiries are not grouped with your mortgage inquiries. The effect of these inquiries fades quickly and is usually pretty small — typically 5 points or less for FICO scores, for example. But even a small ding could cause you to pay more in interest if your scores aren’t already excellent.

Q&A: Credit reports vs. credit scores

Dear Liz: I recently downloaded both my wife’s and my own credit reports. I noticed that, for a number of reasons, her report has much less information than mine. The probability is that I will die before her, so my question is whether you can suggest any ways to be sure she has a good credit rating after I’m gone. Do the credit reporting agencies give any weight to a spouse’s score?

Answer: They do not, unless the spouse is alive and a co-applicant.

The amount of information in a credit report doesn’t dictate someone’s scores, however. People can have good scores with only a few credit accounts, or bad scores with lots of accounts. Your wife should find out what some of her scores are to decide next steps. Her bank or credit card issuer may supply her with scores, or she could get free scores from one of the many sites that offer those. (FICO is the formula most often used by lenders, but VantageScore can give her a good idea how lenders view her, as well.)

If her scores are less than excellent (generally 740 and up), she could look for ways to improve them such as making all credit payments on time, using only a small fraction of her available credit and perhaps adding an account or two. Credit builder loans from credit unions can be a good way to build or rebuild credit.

Q&A: How a card switch affects your credit score

Dear Liz: I have one American Express card and two Visa cards, all of which I have held for many years. I received notice that my American Express card was being converted to a Visa card. I do not want a third Visa card but have no choice. For credit score purposes, will this conversion appear to be a closing of my old card and an application for a new one? Obviously, closing a long-held credit card and applying for a new one will affect my excellent credit score, which is 830. If I decided to apply for a new American Express card, how would that impact my score?

Answer: Conversions from one issuer to another can have a temporary negative impact on your credit scores as one account is closed and another opened. The effect should be minor as long as you have other open, active accounts.

Within a month or two, the new account should show the same history as the old one, and your scores should recover. (You have more than one credit score, by the way, and your scores change all the time. As long as they’re generally above 760 or so, you should get lenders’ best rates and terms.)

The type of card usually matters less than the benefits associated with the card. If those benefits are useful to you and are enough to offset any annual fee, consider keeping the card. Its long history and credit limit are likely helping your scores.

That doesn’t mean you have to keep a card you really don’t want. The fewer cards you have, though, the more careful you probably need to be about closing one.

You can still add an American Express or other card to your portfolio. Adding a new card typically dings your scores less than five points. The effect is temporary, and the new account could contribute positively to your scores over time.