Don't Sweat Small Changes in Your Credit Scores

Question: Recently my credit score dropped from “exceptional” to “very good.” I put a security freeze on all of my credit reports, and I closed out an auto loan around the same time. Did either of those actions cause my score to drop?

Answer: Neither of those actions is likely to have had an effect on your scores, says credit expert John Ulzheimer, formerly of credit-scoring company FICO and credit bureau Equifax. He advises people to stop worrying about minor changes in credit scores. “There’s a natural migration to your scores, normally 20 to 25 points month over month,” he says. “Your scores should stay within that range and, if so, it means your scores are moving in a normal, healthy manner.”

A credit freeze doesn’t hurt your credit scores, says Ulzheimer. “Security freezes simply restrict access to your credit reports to existing creditors” plus a handful of other parties such as government agencies and collection agencies, he says. “But the scoring systems are still able to see all of your information during the scoring process.” A freeze can help protect you from identity theft, but it can also make some things more complicated—such as applying for insurance or opening a bank account. (See the related article Pitfalls of Freezing Your Credit).

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Also, paying off an auto loan doesn’t cause a score to drop, Ulzheimer says. But, he points out, it isn’t likely to help your scores, either, because installment debt has only a small impact on your scores.

Ulzheimer says that small score changes often stem from fluctuations in credit card balances, which cause your debt-to-credit ratios to rise and fall. Nearly 30% of your FICO score (the credit score most lenders use) is based on amounts you owe. Keep an eye on your credit utilization ratio, which is the percentage of available revolving-account credit you’re using. If the total credit limit for all of your credit cards together is $20,000 and you’ve charged $2,000, for example, your utilization ratio is 10%.

Even if you pay the full credit card balance by the payment due date, your utilization ratio won’t necessarily be zero because the ratio is based on the balance your lender reported to the credit bureau—which is usually the balance from your monthly statement. It helps to keep your utilization ratio particularly low for a month or two before you apply for a loan, either by charging very little or by making sure to pay off your balances before they’re reported to the credit bureau. For more information, see the Amounts Owed explanation at MyFico.com.

For more information about credit scores, see How Your Credit Score Is Calculated and MyFico’s credit basics page.