Credit Score: Why It's Constantly Changing

Successfully obtaining a mortgage requires meeting certain numbers. There's the amount of the down payment that you must have in your bank account. The amount of annual earnings you must show to prove you can manage the mortgage. And then there is your credit score.

Right now, that credit score needs to be in the mid 700s in order for most lenders to offer the historically low interest rates that are tempting buyers. It is that score that tells the bank that you are the kind of person that pays your bills, and pays them on time.

And if you are the type of person that pays your bills on time, then you are probably the type of person that plans ahead. Mortgage brokers and lenders will tell you that before you apply for a mortgage, you should get a copy of your credit report to ensure that it is accurate, and to know what your score is.

The problem is, said Ken Lin, CEO of Credit Karma, a website that provides free access to credit scores and credit advice, that score is constantly changing. "If you check your credit score right now, and then check it an hour later, everything is subject to change," he said. "There are so many things that affect your score -- depending on when your credit card company is sending its information on balances, and whether you are opening or closing an account -- that it is going to fluctuate."
Tena Friery, research director with the Privacy Rights Clearinghouse, a nonprofit consumer education organization, said the scores are constantly changing because the underlying data upon which these scores are based are constantly changing. What makes it even more difficult to understand, said Friery, is that "the scoring models for all of these bureaus is secret," she said. "So you can't try to figure it out for yourself."

The other factor affecting these scores is that the three main credit repositories -- Experian, TransUnion and Equifax -- are using slightly different data, and different formulas, to determine the scores. For example, a score from Experian will use information about a credit card that might not even be on TransUnion's report.

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All these variables pose a problem for someone who is hoping to get the best deal on a mortgage that they can.

While this is the normal ebb and flow of information, Linn said, it is important for consumers to understand what is happening with their scores and what they can do to control them.

The most important thing consumers need to know, said Friery, is that "one late payment will affect your score. How you have paid your bills in the past is predictive of how you will pay bills in the future," she said. "So it's important to not miss any deadlines."

Another way to keep your score on an even keel is to ignore those department store credit-card come-ons. "If you've opened a number of new accounts right before applying for a mortgage, that would hurt," said Friery. "And if you are all of a sudden maxing out credit cards, that could indicate that maybe you are too deep in debt, and might be a greater risk."

And, while you don't want to open any new credit accounts, you shouldn't be closing any, either. "If you've had a credit card for 12 years, that speaks to your creditworthiness," said Lin. "And, having a credit card, especially one with a zero balance, boosts credit availability."

Ironically, applying for a loan -- such as a mortgage -- can have a negative effect on your score. When the bank "pulls" your credit report, that information goes to the credit bureaus that are responsible for calculating that score. According to an official at Experian, the credit bureau could take 20 points off your score, while at TransUnion, the penalty is about five points. So you want to be sure that when you do apply for a mortgage, your score is already in very good shape.

"Consumers don't see the correlation of financial activity and credit score," said Lin. "If they start checking their score once a month, they will start to see the correlation."

Web sites such as Credit Karma will allow you to check it free of charge once a day. Which might be a little more than necessary, but the key, said Lin, is diligence and monitoring. "By checking it regularly, you can get a handle on what is going on with your score. You'll see that, 'Wow, every time I apply for a new card, it goes down. When I pay bills it goes up.' Your financial health is dependent on your credit score, so we think it's important that people have access to it."

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