Posted on October - 23 - 2010
Why are consumer credit scores constantly changing?
The economic downturn has put Americans’ credit scores in the limelight, especially as more homeowners struggle to stave off foreclosure by refinancing or modifying their mortgage loans. Although a large majority of Americans are working to improve their scores, it’s important to understand how credit scoring works – and the factors that cause consumer scores to constantly undergo changes.
Credit scores provide a snapshot of a consumer’s financial health. This information is largely determined by the information on an individual’s credit report and his or her payment history, both of which evolve on a monthly basis. For example, if a consumer is late with a payment, his or her credit score will decline slightly. In contrast, an individual’s score is likely to rise if he or she makes a payment on time. The same yo-yo effect will continue with nearly every financial move a consumer makes, from opening or closing accounts to submitting an application for an additional line of credit, according to The Los Angeles Times.
While having a positive payment history can only boost your score, it’s important for consumers to be on their best financial behavior when applying for large-ticket items, such as a home or auto loan. Applying for a gas or retail credit card may not seem like a big deal, but submitting an application for a small item while waiting to hear back on a big loan can hurt individuals in the end.
For example, a prospective homebuyer with a credit score of 720 is in the running to receive a competitive mortgage rate. But submitting an application for a retail credit card will result in a hard inquiry on their credit file once the retailer checks their credit, causing their score to decline slightly. A small dip in an individual’s credit score may force them to accept a less advantageous rate.
Individuals can avoid lowering their credit scores during an application process by refraining from submitting new credit applications – no matter how small – and paying all bills on time.
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