I have been working really hard at improving my credit score after some tough times. I thought I was doing all the right things only to find out that my score decreased. How did paying off my car loan and closing some credit cards hurt my score? I got mad and then I got educated.
What causes changes in your credit score:
- Utilization Ratio
- Age of Accounts
- Poor Credit Behaviors
- Not Using your Credit Cards
Utilization Ratio is how much you currently owe divided by your credit limit. Why is this important? Well this little calculation is what hurt my score when I paid off my car. You see, I had $5000 left on a $10,000 loan. When I paid it off $10,000 worth of credit dropped out of the equation and only $5000 in debt. It threw off my utilization ratio and my credit got dinged. In terms of my credit score, the better move would have been to pay off some credit cards and continue to pay down my car loan.
Age of Accounts
FICO not only looks at your oldest account, but also at the average age of your accounts. This is why closing some of my credit cards was a problem. First, I shouldn’t have had so many credit cards. Second, I closed two of my oldest accounts which changed the average age of my accounts to my disfavor.
Poor Credit Behaviors
The bad news is that negative items such as late payments, bankruptcy and foreclosures stay on your credit history for years. This will negatively affect your score. The good news is that over time these events do fall off your credit history and your score can go up.
Not using your credit cards
If you stop using your credit cards the creditor may decide to close your account. This takes us back to that first thing I told you about - Utilization Ratio. If you are building your credit score, set up a small recurring bill to be paid by your credit card and pay it off on-time monthly. For example, I have started using one card to pay my monthly Hulu bill. It’s easy to manage and keeps improving my credit with on-time payments.
The biggest lesson I learned is that credit scores are not a short game. It’s like the stock market. You are in it for the long term. You should be aware and stay educated of what your credit score is and how it is trending but it can drive you crazy to watch it every day. Instead, check your score monthly, choose the credit you open wisely, and make your payments on time. Your score will be on the upswing before you know it.