I want to address a question I’ve been asked a lot lately…
“Why have my credit scores gone down since I last checked them even though I’ve made all my payments on time?”
First let me tell you that the only way your credit scores can go down is if information appearing on your credit reports changes.
Your credit scores are calculated from:
- Information provided by lenders you have accounts with
- Lenders when you apply for new credit
- Public record information (i.e., judgments, tax liens, bankruptcies, etc.)
This information is reported to your credit reports on a regular basis. Sometimes even daily.
Some of the things that will change your scores are:
- Late payments
- Recent credit inquiries
- Higher balances on your credit cards
- Higher balance on your Home Equity Line of Credit (HELOC)
- Closing revolving accounts
- Credit limits increased/lowered
Let’s say you purchase your credit scores and you notice your scores are lower than they were the last time you checked even though you didn’t make any of the mistakes above. What happened?
Step 1: Compare Apples to Apples
There are different kinds of credit scores. You need to make sure you are purchasing your FICO credit scores. Two of the credit reporting agencies are playing a dirty trick on us when it comes to our scores. Credit scores aggressively marketed by TransUnion and Experian are their own proprietary credit scores. Most lenders use FICO credit scores, not TransUnion’s or Experian’s proprietary scores. So buying proprietary scores are useless.
However, Equifax does it right. They only aggressively market their FICO credit score. They get brownie points for holding themselves to a higher standard!
Step 2: Purchase Your FICO Scores from the Same Source
Don’t purchase your scores through one source the first time and a different source the second time around. It doesn’t work that way. You need to purchase them through the same source.
You see, different companies that sell or provide FICO scores use different versions of the scoring software Fair Isaac created to calculate a FICO score. It’s similar to the different version of Microsoft software products. If you asked 50 people what version of Microsoft Word they were using, you would get many different answers. Same basic software, but several version numbers. So it is with FICO scores.
If you purchase your scores through FICO’s Web site and compare them to the scores you received from your auto or mortgage lender… you will most likely have different results.
By always purchasing your scores through the same source you’re guaranteed to have an accurate comparison of what triggered any change in your credit scores.
Step 3: Compare Your Reason Codes
Now that you know you should purchase your FICO scores from the same source it’s time to examine your reason codes. Your reason codes will tell you what changed on your credit reports and give you clues as to why your scores went up or down.
You have four reason codes from each credit reporting agency… for a total of twelve reason codes. What you need to do is compare your reason codes from your previous set of credit reports to the reason codes on your current credit reports.
Your reason codes are in order of importance. So if the order of your reason codes changed it’s a clue something changed on your credit reports that lowered/increased your credit scores.
When you know what your reason codes are you can use them to help you increase your credit scores.
Any new habits you begin today in managing your credit will begin to affect your credit scores in 30 to 60 days. This is due to the lag time between the action you take versus how long it takes the lender to report that action to the credit reporting agencies. So begin new habits today.
About the Author
Stephen Snyder is the founder and president of the After Bankruptcy Foundation, a non-profit organization that provides free bankruptcy information and recovery steps. Stephen is also an author, speaker, and leading authority on bankruptcy recovery and credit scoring.
[tags]Stephen Snyder, credit score, Experian, FICO, TransUnion[/tags]