You recently checked your credit score and noticed that it was higher or lower than you last remembered. What prompted the changes? Credit scores are constantly updated, depending on the activity taking place in your credit file. Read on to learn more about how this works.
Understanding Lenders and Credit Bureaus
Credit bureaus are agencies that collect account data from lenders and creditors and compile it into what’s referred to as a credit report. They also keep a record of outstanding balances owed to other entities that have been referred to collections, along with charged-off accounts, tax liens, bankruptcies and other public records.
When Do Lenders and Creditors Report to Credit Bureaus?
Lenders and creditors generally report to the credit bureaus monthly. Some report more frequently, though, so it’s best to inquire to confirm how often they report and during what part(s) of the month.
You should also know that not all lenders and creditors report to all three credit bureaus. Some only report to two of three or one of the three.
How Often Do Your Credit Scores Update?
Your credit scores could change any time activity takes place in your credit profile. Below is a breakdown of the five components of the two most prevalent credit-scoring models. Review them to understand what changes in your credit report could prompt an increase or decrease in your score.
FICO Score Updates
The FICO score is used by nearly 90 percent of lenders and creditors to make a lending decision. It’s made up of five factors:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
VantageScore Updates
The VantageScore is starting to rise in popularity. Here’s how it’s calculated:
- Total credit usage, balance and available credit: extremely influential
- Credit mix and experience: highly influential
- Payment history: moderately influential
- Age of credit history: less influential
- New accounts opened: less influential
Why Does Your Credit Score Change?
As mentioned above, credit score changes result from activity in your credit profile. Here is an overview of the types of activity that could impact your credit score.
Hard Inquiries
Whenever you apply for a credit card or loan product, the lender or creditor reviews your credit report and score, prompting a hard inquiry. This, in effect, drops your credit score by a few points and remains on your credit report for up to two years. However, the impact is only short-term, and hard inquiries won’t impact your credit score at all after 12 months.
Late Payments
Late payments usually mean bad news for your credit score. They can cause a significant drop of up to 100 points – the higher your credit score was before the late payment, the steeper the decrease will be. Late payments sit on your credit report for up to seven years, but the negative impact dwindles over time.
Bankruptcies
It’s never fun to go through bankruptcy and deal with the lasting financial effects. And unfortunately, your credit score will also take a dive when the filing hits your credit report. The upside is despite bankruptcies remaining on your report for up to 10 years; you can take steps to start rebuilding your credit health.
Credit Mix Changes
Credit mix accounts for 10 percent of your credit score. Lenders and creditors like to see an assortment of revolving accounts (i.e., credit cards) and installment accounts (i.e., personal loans, student loans, auto loans and mortgages). If you only have one type of credit and apply for another to balance out your credit mix, your credit score could improve. However, you should only apply for credit as needed.
Credit Profile Changes
Any positive or negative activity in your credit profile could prompt a change in your credit score. For example, a paid-off account or recently opened account that improves your credit mix could result in an increase in your score. But a new late payment, collection account or excessive inquiries could have the opposite effect.
Age of Accounts
Seasoned accounts in good standing can help your credit score over time. They demonstrate to lenders and creditors that you’ve responsibly managed debt for an extended period.
Balances
Another significant component of your credit score is your credit utilization rate. It accounts for 30 percent of your credit score and is calculated by dividing your current balance into revolving accounts by your total credit limit. Ideally, you want to keep this at or below 30 percent – 10 percent is even better. Any time this percentage changes, you can see a change in your credit score.
How Long Does It Take for Your Credit Score to Update After Paying Off Debt?
As mentioned above, most lenders and creditors report to the credit bureaus monthly. So, any accounts you pay off will be updated in your credit report on the normal monthly reporting date.
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