The economic downturn has put Americans’ credit scores in the limelight, especially as more homeowners struggle to stave off foreclosure by refinancing or modifying their mortgage loans. Although a large majority of Americans are working to improve their scores, it’s important to understand how credit scoring works – and the factors that cause consumer scores to constantly undergo changes.
Credit scores provide a snapshot of a consumer’s financial health. This information is largely determined by the information on an individual’s credit report and his or her payment history, both of which evolve on a monthly basis. For example, if a consumer is late with a payment, his or her credit score will decline slightly. In contrast, an individual’s score is likely to rise if he or she makes a payment on time. The same yo-yo effect will continue with nearly every financial move a consumer makes, from opening or closing accounts to submitting an application for an additional line of credit, according to The Los Angeles Times.
While having a positive payment history can only boost your score, it’s important for consumers to be on their best financial behavior when applying for large-ticket items, such as a home or auto loan. Applying for a gas or retail credit card may not seem like a big deal, but submitting an application for a small item while waiting to hear back on a big loan can hurt individuals in the end.
For example, a prospective homebuyer with a credit score of 720 is in the running to receive a competitive mortgage rate. But submitting an application for a retail credit card will result in a hard inquiry on their credit file once the retailer checks their credit, causing their score to decline slightly. A small dip in an individual’s credit score may force them to accept a less advantageous rate.
Individuals can avoid lowering their credit scores during an application process by refraining from submitting new credit applications – no matter how small – and paying all bills on time.
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