Credit scores can seem like a mysterious black box if you’re unfamiliar with how they work. Yet free credit score monitoring has become ubiquitous.
It’s common for people to get an alert that their credit score has dropped by a significant amount of points for no apparent reason. It can be disconcerting. But often a fluctuation in your credit score is innocuous.
How can you find out exactly why your credit score dropped? That’s what a listener of the Clark Howard Podcast recently asked.
How Do I Find Out Why My Credit Score Dropped?
Asked Cynthia in Wisconsin: “My credit score recently dropped from 820 to 730. How can I find out why when my finances have not changed? I don’t have debt and have not missed any payments.”
It’s important to understand where credit scores originate. You have probably heard of the three major credit bureaus: Equifax, Experian and TransUnion. They formed a joint company called VantageScore.
VantageScore is a competitor to Fair Isaac Corporation, more commonly known as FICO. The two models have slightly different formulas for calculating your score.
Most lenders reference your FICO score, which Clark calls “the gold standard” of credit scores. But when you’re checking your score, you’re more likely to see your VantageScore depending on whether you’re checking through one of the major credit bureaus, a credit card or a service such as Credit Karma.
“The likeliest immediate cause of a 90-point drop, particularly if this is the VantageScore model — VantageScore moves very rapidly based on how much you charged in that month,” Clark says.
“If you’re not signed up yet, go set up a Credit Karma account. And you’ll be able to see the factors [that caused the 90-point drop].”
Explain How My Credit Utilization Rate Could Drop My Score
How, exactly, can my credit utilization rate drop my score? Especially if I’m paying off my credit cards at the end of each monthly billing cycle?
There’s a simple ratio that helps determine your utilization rate. It’s the percentage of your total credit limit (add up the credit limit on all of your credit cards) that you’re using at a given time.
Concrete Examples of Credit Utilization Rate That Could Lower Your Score
Let’s say I have $50,000 in credit. But I go on vacation to Greece this week and live so large that I spend $15,000. I’m now using 30% of my credit.
Of course, in this hypothetical, I pay off all $15,000 on my credit card at the end of the billing cycle. I’m not a chump that’s going to pay only the minimum and allow the credit card companies to zap my wallet with a constant drip of interest owed.
Still, the credit score entities could check how much credit I’m using between the time I charge all that money and the time I pay it off.
“The likeliest cause is in fact how much you charged in a previous cycle,” Clark says. “Regardless if you [later] paid the balance in full.
“I’ll get these notices based on VantageScore. I got one the other day and it was this exclamation point about my score had gone up 63 points.
“It was simply because I had very low utilization of credit cards that month. And the month before because of travel I had a much higher utilization rate and they just clobbered me with it.”
People sometimes over-index toward anxiety when their credit score drops a small amount. Of course, 90 points are considerable. But 730 is still considered a good score — and nearly very good.
It can feel less volatile if you have a good understanding of your credit score factors. There’s more than one way to check your specific factors. But Clark recommends Credit Karma.
“Since Credit Karma is free, you’ll be able to track your scores with a good reasonable sense of how you’re doing and what things you can do to improve by using the free Credit Karma tools,” Clark says.