Your credit score is an important part of your financial life. Though it might not be something you track regularly (though you probably should), it can have a major impact on your finances.
Given the huge impact that your credit score has on your life, you should be aware of your score, how it works, and when your score gets updated.
Learn how credit reporting works and how that affects when your credit scores are refreshed and updated.
Why Should You Care When Credit Scores Update?
You may be wondering why you should care when your credit score gets updated. It’s not like it can change that much in a short period of time and its changes don’t have a huge impact on you, right?
Besides the fact that it’s just a good thing to be aware of, just like other aspects of your financial life, there’s one situation in which you should pay close attention to when your credit score updates.
It is especially important to be aware of your credit score when you are applying for a major loan. Whether you’re applying for a mortgage, car loan, or business loan, your credit score has a massive impact.
Save money with a well-timed credit score boost
Consider applying for a mortgage. You borrow $300,000 to purchase a new home. You have an excellent credit score of 765.
When you are approved for your loan, the APR will be 3.603%. You’ll pay $1,364 per month, for 30 years, paying a total of $491,040 over the life of the loan.
If your score drops just 10 points, to 755, you’ll qualify for a loan with an APR of 3.825%.
Your monthly payment will be $1,402, just under $40 more than if your credit score had been just 10 points higher. Over the life of the loan, you’ll pay $504,720, more than $15,000 more than you would have with the lower interest rate.
It’s very easy for your credit score to change by 10 points, or more, in a month. With such a small change in your score having such a big impact on your loans, it’s important to track it closely.
With a slight credit score boost, you could become eligible for it before the deal goes away.
When Do Credit Scores Update?
So, when does your score actually update? The answer isn’t as simple as naming a date. Your credit score is updating all the time.
The exact time when your score changes will depend on your actions and your credit or loan accounts.
When your credit card statement closes, the company that issues the card will report data to the credit agencies it works with. It will tell them information about your loan.
For example, it will tell the credit agencies whether you made a payment last month, whether it was on time, and what your current balance is.
The card issuer will also include information on your credit limit, how long you’ve had the card and other things of interest.
The credit agencies will take the information provided by the card issuer, and add the new information to your credit report. Then your score will be recalculated using your credit report’s updated information.
If you didn’t use your credit card at all in the previous statement period, your score probably won’t change at all.
If you made a large payment or made a big purchase, there might be a large change in your score.
If you have multiple credit cards and loans, your score will change every time one of the statements closes.
That can make it difficult to track when exactly your score will change. If you really want to keep close tabs on your score, try to change your statement end dates on each card to the same day of each month.
How Your Credit Score is Calculated
Calculating your credit score involves a complicated and proprietary formula. Each credit scoring agency has its own scoring system and no one but the agency knows exactly how each system works.
The FICO score is the industry standard credit score used across the financial industry.
Though the exact formula is a secret, the FICO Company has provided information on the factors that go into determining your score.
This is the biggest component of your credit score. Equifax claims that it makes up a full third of the scoring formula.
Lenders want to see that you are able and willing to make timely payments on your loan.
The longer your history of making payments, the better it is for your score. If you miss a few payments, it will impact your score until you can get a good streak of on-time payments going again.
Things like bankruptcies, judgments against you, or accounts in collections reflect poorly on your ability to pay your debts.
Each item of public record will lower your credit score significantly.
Try to avoid letting any of these show up on your report. Over time, they’ll fall off your report and stop having an impact.
If you do have an account sent to collections, make an effort to pay it. It will give your score a slight boost.
Length of History
The longer you’ve had a credit score, the better. The more information in your credit report, the easier it is for lenders to accurately judge your financial tendencies.
As you use credit more and become more a known quantity, lenders become more willing to lend to you.
Every time you open a new card or receive a new loan, your score takes a small hit. Over time, your credit score will return to normal.
The reasoning behind this is the fact that getting multiple loans in a short time is a warning sign.
If you suddenly borrow a lot of money, you might not be able to handle the payments, or might not be planning to pay at all.
Every time you apply for a loan, a note is made in your credit report. Like opening new accounts, applying for a lot of loans at once is a warning sign.
Each application will drop your score by a few points. Inquiries are removed from your report after two years, making their impact small and short-term.
Credit Utilization/Amount Owed
The more you owe, the worse your credit score will be. That’s because the less you owe, the easier it will be for you to make payments on a new loan.
Part of this portion of your score is the calculation of your credit utilization ratio. That is, the amount you owe versus the combined credit limit on all your credit cards. The lower the ratio, the better.
Types of Credit
Diversity in your credit lines shows that you can manage different types of loans with varying repayment structures.
In order for this factor to be taken into account for a credit score update, you'd have to have opened a new type of credit line successfully.
How to Boost Your Credit Score
If you’re applying for a major loan, like a mortgage or car loan, it’s in your interest to have your score as high as possible when you apply.
Though it’s difficult to have a large effect on your credit score in the short-term, you can still move it by a dozen or more points.
You’ll need a month or two to plan.
Requesting a copy of your credit report
By law, each of the major scoring agencies must provide you a copy of your score once per year, for free.
You can also use a free service to do this. Then, really look at your report. See if there’s anything wrong with it, like an account in collections that isn’t really yours. If you see an error, dispute it with the agency.
If you can prove that the report is wrong, the account will be removed from the report, boosting your score.
Decide when you’ll apply for your loan
In the month before you apply for the loan, stop using your credit card.
Make sure that the statement closing date comes at least a week before you apply for the loan. Then, pay down your credit card balances as much as you can. Aim to have a credit utilization of 25% or less.
Try paying towards your credit card balance twice a month
The card issuer only reports the balance as of the statement’s closing date. Any portion of your balance that you paid before the statement closed won’t be reported as a balance on your credit score.
Request a credit limit increase
If you’re asking for a small increase, many card issuers won’t check your credit score. That avoids an inquiry from dinging your score and improves your utilization ratio.
Ask to become an authorized user
If you have a family member or friend with a great credit score who you trust and who trusts you, you can be an authorized user on his or her credit card account(s).
Many companies report authorized users to credit scoring agencies. If the account is in good standing, it can help your credit score.
Credit scores are important in today’s world, but many people don’t know enough about them. Understand how they work and you can use the knowledge to your advantage.
These tips can help you prepare the best credit score possible in time for applying for a new loan.