TL;DR: Closing an old un-used credit account might hurt your score; your score will go up or down for a variety of reasons; a good credit score does not automatically mean you will be approved (it goes a long way though)

4 minute read

Almost everyone wants a higher credit score, but there are still myths about that magical 3 digit score. What does it mean? How and why does it change? Why is it different from one provider/lender to the next?

Your credit score is based on all the information in your credit bureau file, which is filled with data from any lender or collection agency that you have dealt with. As this information changes (monthly in the case of credit cards/loans/mortgages etc.) your score will change based on the new information. 

5 Questions and Answers!

Q: Should I close that old credit card I never use?
A: It depends. Probably not. Here's some food for thought:

One of the factors that determines your score is the utilization rate, which is the amount of money you owe, divided by the total limit. Each credit account will have its own utilization rate, and you will have an overall utilization rate for all of your accounts combined.

Let's suppose you have 3 credit cards. 1) a $5000 limit, with $0 balance; 2) a $10,000 limit with a $5,000 balance; and 3) a $5,000 limit with a $5,000 balance.

In this example, you have $20,000 of available credit, and $10,000 owing. That would result in an overall utilization rate of 50%. Card #3 has a utilization rate of 100%.

If you closed card #1, you now have $15,000 of available credit, and you still owe $10,000. Your overall utlization rate has now climbed to 66.67%, and this would negatively impact your credit score. Card #3 being maxed out is also dragging your score down.

The age of your credit accounts is also a factor in how your score is calculated. So those old, unused credit cards are actually a good thing for your credit score. If you have a paid-off credit card you haven't used in a while, it could get declared inactive and closed by the lender, so it doesn't hurt to use it from time to time.

Q: Do I need a perfect score to get the best credit offers?
A: Not really.

For those of us who are perfectionists, it only seems natural to aim for perfection here, too. Sadly, a "perfect" credit score is nearly impossible (we've never seen one) and as long as you have good to better credit, you will generally have access to the most competitive rates and terms.

Q: Why does my credit score go up and down?
A: It's perfectly normal, and it will change often! There are many factors that drive increases and decreases in your score.

Fluctuation is totally normal when it comes to credit scores. Here are some of the reasons why this might happen:

New information. Credit scores are calculated based on information in your credit reports. That information is regularly updated as lenders and creditors, collection agencies and other sources report information to the two nationwide credit bureaus. The data could include balance changes reported monthly by lenders and creditors, the opening of new accounts, or payments on existing accounts.

Differences among credit bureaus. Some lenders and creditors report to both nationwide credit bureaus, while others may report to only one (or none at all). This means information used by the credit bureaus or by other companies to calculate your credit score may differ. In addition, there are different credit scoring models used by credit bureaus and companies to calculate credit scores.

Time. If there are any late or missed payments, then time is your friend. As time goes on, the "miss" or "derog" (short for derogatory, in our lingo) will count for less and less. This doesn't mean "go ahead and skip a payment, it'll be fine if you wait long enough." It just means if "life happens" to you and you should happen to miss a payment, then as long as you get caught up and pay everythign else on time, every time, your score will heal quickly and without issue. Eventually the missed payment will not even report on your credit file.

Payment history. The most important piece. THE. MOST. IMPORTANT! Paying on time = good. Paying late = bad. Not paying at all = really bad.

Utilization rate. As explained above, your utilization rate, or debt-to-credit ratio, is a key factor in your score. Do your best to avoid having any single account maxed out, and definitely avoid being maxed out on an overall basis. If you need to carry debt, try to make sure your total debt does not exceed 50% of your total available credit.

Q: Does every credit check (inquiry) hurt my score?
A: Simply put, an inquiry is when you or another company or individual requests access to your credit file. There are two types of inquiries: “hard” and “soft” inquiries. 

Hard inquiries may negatively impact credit scores. These happen when a company or individual checks your credit report because you applied for credit.

If you’re shopping around for the best terms for a car loan or mortgage, generally only one of those inquiries with a specified window of time will affect your credit scores. In other words, if you go from car dealership to car dealership and apply 5 times, but only take 1 loan - your score would only be affected as if you had applied once. Depending on the credit scoring model used, the time period is usually 7 to 45 days. This exception doesn’t apply to credit cards, though – if you apply for multiple credit cards, each hard inquiry may impact credit scores. 

“Soft” inquiries do not impact credit scores. Examples of soft inquiries might be you checking your own credit reports, or an existing creditor reviewing your credit reports in connection with a periodic review of your account.

Q:Does a good credit score guarantee I can get credit?
A:Not necessarily. 

While having a good credit history is definitely helpful in getting better loan terms, lenders use many factors to decide whether to approve you, and on what terms. Your credit score, while very important, is only one of them. Other factors include information such as your income, your down payment, or the amount of the loan.

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