Credit scores aren’t static. They don’t rise and fall like temperature. No, credit scores are simply a snapshot evaluation of your credit report information at a given point in time. But when the information on your credit reports changes, your scores will generally be different the next time they’re calculated.
Certain credit events may lead to a predictable difference in your credit scores. For example, if your credit report shows a new missed or late payment, a new collection account, or a new tax lien filed against you, you can presume that your credit scores will be impacted. But it’s not always this clear cut. Sometimes your credit score changes for less than obvious reasons.
Lower Credit Card Credit Limits
You may already be aware that your credit card balances can impact your credit scores significantly. More specifically, it’s the relationship between your credit card balances and your credit card limits that can influence your credit scores.
This relationship is known as your revolving utilization ratio. As you use up more of the available limit on a credit card, your revolving utilization ratio rises, and your credit scores will generally fall as a result.
Obviously, charging up a higher balance on your credit cards and failing to pay off that balance in full each month is usually the primary cause of an increased revolving utilization ratio. However, ringing up a large balance on your credit card accounts isn’t the only action that can cause your utilization ratio to increase.
If your credit card issuer lowers your account limit, your utilization level could automatically increase, even if you don’t charge one additional dollar on the card. It’s simple math: A $1,000 balance on a $5,000 credit limit yields a utilization ratio of 20%. If your card issuer drops your limit to $3,000, however, that same $1,000 balance suddenly represents a 33% utilization ratio.
While it has nothing to do with your spending — your card issuer simply changed your terms, resulting in a higher utilization ratio — it doesn’t really matter why your utilization ratio rises; the negative impact on your credit scores will be the same.
The Issuer Closed Your Credit Card Account
As noted above, credit scoring models aren’t designed to ask why your utilization ratio increased, only whether your utilization ratios are now higher. And if a card issuer closes your credit card account, that can reduce your overall available credit, thus triggering an increase in your revolving utilization ratio. When this occurs, your credit scores are almost sure to decrease, and the decrease could be considerable.
Credit card issuers may close an account for a variety of reasons, including late payments, other new credit problems (even on unrelated accounts), or account inactivity. Regardless of the reason, if a card issuer closes your account while you have outstanding balances on any other credit card, your revolving utilization ratio will increase, and there go your scores.
Filing Bankruptcy Can Lead to a Higher Credit Score. Yes, Really.
Did you know that filing for Chapter 7 bankruptcy could actually improve your credit scores? Stay with me. If higher credit card balances and balances in default can lower your credit scores, then it shouldn’t be inconceivable that a decrease in balances and balances in default can lead to higher scores.
A Chapter 7 bankruptcy wipes away all the debts on your credit reports if they are statutorily dischargeable. This has the same effect as paying down your balances. Of course, any such increase is not likely to be a big one relative to the harm caused by the bankruptcy filing, and the fact that your debts may actually be in default.
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- Debunking Four Common Credit Myths
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.