Relax If You See Small Changes In Your Credit Score

Why the numbers don't always reflect your financial health

iStock / Getty Images

Linda Stern

En español

Published October 11, 2021

I see you, perfectionist reader — always checking your credit score and feeling bad when it has dropped a few points. Judging from the email I get, I’d say you have company. People worry about scores that are good but not great, and great but not perfect.

Maybe it’s because we’re always measuring our lives with numbers like cholesterol levels and miles per gallon. Or maybe it’s all those credit monitoring ads we see. Yes, you want a good credit score. That three-digit number can make a crucial difference at certain times — such as when you’re applying for a loan or a credit card, or when you’re renting an apartment.

But I’m here to tell you that your credit score is one number where good is good enough and perfect isn’t very meaningful. It is not a measure of you as a person. Constantly monitoring your score is pointless and sometimes harmful. “I encounter a surprising number of people who are so obsessed with a good credit score that they are afraid to take good financial actions,” says Kelley Long, a Tucson, Arizona, financial planner.

So keep your score in perspective.

Know the basics

Your report is a history of your bill-paying life. Credit reporting agencies — the big ones are Experian, Equifax and TransUnion — independently keep records of your credit cards and loan accounts, the debt you carry and the payments you make. That data is fed into formulas by credit scoring companies — FICO and VantageScore, chiefly — resulting in a number on a scale from 300 to 850. Lenders and other businesses use those scores to decide your creditworthiness, the interest rates they’ll charge you and the financial risks you pose to them. Several factors affect your score, but the most important one is payment history: To maintain or improve your score, prioritize making all your debt payments and making them on time.

Scores open doors

A credit score in the mid-700s or above puts you in a good position to qualify for the best interest rate offers on loans and mortgages, says Colleen McCreary of Credit Karma, a finance website.

If you are planning to spend the rest of your life debt-free, your credit score likely matters a lot less than it would if you might need a mortgage. But a good score can help you even after you think you’re done borrowing money. It can cut your car insurance rates in many states or lower your apartment rental security deposit. A bad score could be held against you when applying for a job. So every few months, check your credit reports (at annualcreditreport.com) for problems and mistakes; get your score once a year and about six to nine months before applying for a major loan. Then, unless there’s a problem, give it a rest. Many banks offer their customers free scores; you can also find the VantageScore for free on websites such as Credit Karma and Credit Sesame.

The numbers can lie ...

Scores don’t always reflect your financial health. Someone who has balances on a lot of credit cards and makes minimum payments may have a good credit score but be on the road to debt hell. And if you’ve paid off your mortgage, avoid debt and don’t use a credit card, you may not have the credit history needed for a good score.

... and gaming them can hurt

Some factors that can raise your score are double-edged swords. For example, a long credit history produces a higher score. But keeping a dozen or more old credit accounts open is not helpful and is even an invitation to fraud, Long says. Your score may also decline temporarily if you apply for a loan and the lender requests your credit score. But that shouldn’t stop you from shopping around when you’re taking out a mortgage or auto loan.

The worst reason to care too much about your credit score is if you’re in trouble — juggling bills you can’t pay off. Working with a reputable credit counseling agency will hurt your score. But take the hit. Killing your debt may launch a solid financial future, and a dip in your credit score will not be a tragedy.

Linda Stern, former Wall Street editor for Reuters, has been covering personal finance since the 1980s.