Here's How Often Your Credit Score Gets Calculated

By Julie Rains on 16 May 2017 0 comments

Achieving and maintaining an excellent credit score may help you qualify for the best interest rates when you borrow money, potentially saving you thousands of dollars over the life of your loans. That's why it's especially important to check your credit when you begin to consider borrowing for a large purchase such as a home or car.

It helps to first understand how your credit score is calculated, what you can do to change it, and how long those changes take to impact your score.

Factors determining credit scores

Credit scores derive from credit reports, which consist of information about your credit history and activity with various lenders and creditors. Credit reports are maintained by the major credit reporting agencies, Equifax, Experian, and TransUnion.

FICO is the credit score provider most commonly used by lenders The five factors that go into your FICO score, broken down by how much they contribute to your score, are:

  • Payment history (35 percent): How timely have you been with payments on credit card balances, student loans, mortgages, etc.?
     
  • Amount you owe (30 percent): What are your credit balances and credit utilization ratio (your current balances compared to your credit limits)?
     
  • Credit history length (15 percent): How many months or years have you had credit and maintained relationships with creditors?
     
  • New credit (10 percent): How many new credit cards, loans, and credit-related accounts do you have? Too much new credit could make you appear desperate to lenders.
     
  • Types of accounts or credit mix (10 percent): how many different types of accounts do you have (mortgage debt, car loans, credit cards, etc.)? The more types you have, the better it is for your score.

Making timely payments, judiciously using available credit, maintaining long-standing account relationships, avoiding new credit, and holding diverse types of credit may influence your credit score positively.

How frequently credit scores get calculated

If you're working to improve your credit score, you may wonder how frequently your score is calculated and adjusted. Theoretically, knowing this frequency could enable you to monitor your credit score's movement, up or down, in response to your actions.

According to Experian's Director of Public Education Rod Griffin, credit scores aren't ever truly adjusted. Instead, each and every credit score that's calculated is unique. It's a snapshot reflecting your creditworthiness at a particular moment in time. Your score is based on your credit report when a score is requested and the proprietary formulas created by lenders or credit score providers, such as FICO and VantageScore. In addition, these providers each have different scoring models for different lending purposes. (See also: What Do All the Different Credit Scores Mean?)

For example, if you're getting ready to borrow money to purchase a new home, your mortgage lender may use a FICO score that's indicative of your credit risk for mortgage borrowing.

A few days later, you might decide to apply for a credit card. The card issuer may use a bank card scoring model in calculating this credit score. The number may be different from the mortgage-based score because it's based on a different formula and possibly new information on your credit report.

Generally, your credit report is updated whenever new information becomes available, for example, when creditors report payments at the end of their billing cycles.

Despite varying formulas and purposes, your credit scores tend to be similar, Griffin says. That's because scores are based on your credit reports, and the information contained in these reports tends to be consistent among reporting agencies.

Credit steps to take before a mortgage or car loan application

Griffin says reviewing your credit reports should be part of your financial routine. He emphasizes the value of keeping reports positive, not simply trying to fix your numbers: "Taking care of your credit reports means taking care of your credit scores."

But if checking your credit reports hasn't been on your to-do list, start paying attention to your information as soon as you think about borrowing for a major purchase and at least three to six months before applying for a loan. This time frame may allow you time to dispute any errors and make moves that could enhance your creditworthiness.

Here are steps to consider taking.

1. Review credit reports for accuracy

Access your credit reports from the three major credit reporting agencies through AnnualCreditReport.com. Federal law mandates that you can get one free credit report per year from each agency.

Review reports to make sure the information is accurate and up-to-date. For example, check home addresses and employer names. Notice whether outdated information lingers.

If something's not right, you can dispute errors on your credit report. Contact the credit reporting agency and information source (such as a former creditor) to describe errors and request corrections. The Federal Trade Commission (FTC) provides useful sample dispute letters for credit reporting agencies and information providers that can help you get an idea of what to write.

You may be able to use dispute resolution processes offered by credit reporting agencies. For example, Experian's online dispute process allows consumers to file a dispute from its website.

2. Look at your scores

Consider requesting a credit score to determine where you stand when trying to use your number to your advantage. A one-time report and score could be helpful to understand your current status and offer a baseline for monitoring changes in the future.

You can get scores using these methods:

3. Monitor your scores

As you prepare for a major financial event, such as getting a mortgage or refinancing an existing home loan, consider monitoring your credit reports and scores over time to keep on top of any changes that occur.

Credit monitoring is available for a fee from credit reporting agencies and other sources, such as myFICO. You might also consider tracking your credit scores through free sources. For example, you might just keep note of scores offered by your credit card company every month.

This scrutiny can be helpful but alarming. Griffin tells borrowers not to panic if they see changes from month to month, as credit scores move up and down frequently. He says that generally you don't need to be concerned with volatility as long as the scores trend upward over a longer time frame. (See also: Why You Shouldn't Panic If Your Credit Score Drops)

4. Take actions as appropriate

When you receive your credit score, generally you'll also get a list of factors indicating why your number is less than perfect. These risk factors indicate where to focus your attention. (See also: How to Increase Your Credit Score Quickly)

When personal finance educator Kate Horrell's credit score fell from the 800s to 660s just a few months before a mortgage refinance, she realized that the decline reflected two factors: She had taken on new credit using a 0% APR credit card; and she had increased her credit usage to manage about $100,000 in home renovations.

Still, Horrell was surprised at the impact on her scores, considering her stellar history. She couldn't do anything about the new account but found ways to pay off the card balance quickly. When she applied for the mortgage refinance a few months later, her score had increased to the mid-to-high 700s, enabling her to snag a 3.125 percent rate.

Griffin emphasizes that the risk factors named with your credit score don't always warrant action. In some cases, it's not worth it to address risk factors just to raise your score a few points.

For example, my lack of both credit diversity and recent installment loans dings my score, which is still above 800 and considered "exceptional." However, I don't plan on taking out a new loan just to try to boost my number.

While you can't predict the precise impact of specific actions, you can learn what moves reflect positively on your credit report. As your credit report is updated (with new and hopefully, improved, information) your credit scores could trend upward, potentially enabling you to take advantage of your numbers for cost savings.

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