Tracking your credit scores closely has become a much easier task than in the past. There is no shortage of websites that will allow you to access your credit scores completely free of charge. There are also other services that will grant you monthly access to your credit reports and scores for a fee. In addition to these sources, many credit card issuers will now even share one of your FICO or VantageScore credit scores every month.
As a result of this easy access to your credit data many consumers are beginning to keep a closer eye than ever before. However, if you start to monitor your credit from month to month you may begin to notice some periodic fluctuations in your credit scores – fluctuations that can sometimes be quite frustrating if you do not understand the reasons why your credit scores changed to the negative.
If you are making an effort to improve your credit scores, perhaps in anticipation of applying for a mortgage or another type of loan, it can be maddening to make a series of what you believe to be positive financial moves only to discover that your scores decreased from the previous month. This phenomenon is more common than you might think and as a credit expert I am constantly asked a question that goes something along the lines of “John, I made “X” positive changes on my credit reports but my credit scores dropped. What gives?”
There are many reasons why your credit scores could have fallen from one month to the next. Naturally, if new derogatory information appeared anywhere on your credit reports (i.e. a new late payment, a new past due account, a new collection account, a new public record, etc.) then the reason for your credit score slide would be easy to explain. However, sometimes the reason behind a credit score decrease is not so obvious. Here are a few lesser-known culprits to consider and may explain your credit score taking an unexpected U-turn.
1. Paying Collections Generally Will Not Improve Credit Scores
The reason why paying off an old collection account typically will not have a positive impact on your credit scores is because most scoring models currently used by lenders do not care much about the balance of your collection accounts, but the fact that you had a collection account in the first place. Paying the collection won’t result in it disappearing, but it is a good idea regardless of the fact that most of the time it won’t lead to a higher score.
2. Something Less Obvious Changed to the Negative
Late payments, fraud, and new derogatory accounts or public records are an easy-to-recognize event that could trigger a negative credit score change. However, there are also less obvious credit troublemakers as well. For example, if everything on your credit reports remained the same between the months of June and July except that your credit card balances increased significantly during that time frame then your scores will likely fall. Higher balances on credit cards will negatively impact your credit scores even if you make every single payment on time.
3. Scorecard Hopping
This is going to be a little technical but still worth mentioning. Perhaps the most difficult to identify source behind hard-to-explain credit score decreases is the “scorecard hop.” Credit scoring models like FICO and VantageScore use scorecards to calculate credit scores. Scorecards are the actual algorithms inside a credit scoring model that does the math to determine your scores. There are several scorecards inside every scoring model and they will all calculate scores differently.
The details behind FICO and VantageScore scorecards is not publically available, but some examples of scorecards are used to calculate unique populations of people who have filed bankruptcy, consumers with “thin” credit reports, and consumers with credit reports free of any derogatory information. As your credit information changes it is possible to hop from one scorecard to another and, although it is unusual, hopping to a new scorecard could potentially lead to lower credit scores as well. This generally occurs if something negative hits your credit reports or an account that was previously helpful is removed from your credit reports.