How Much Does Your Credit Score Drop When You Buy a Car?

How Much Does Your Credit Score Drop When You Buy a Car?

If you’re like most Americans, you want to ensure that you have the best possible credit score. That said, if you’re planning on purchasing a vehicle and financing it, you might be wondering how much does your credit score drop when you buy a car? When you buy a car, your credit score may initially drop anywhere from 10 points to 50 points. The number of points your credit score will drop when you buy a car depends on the number of banks your dealership shopped at to get you financing for your new car. For example, if the dealership shops around at five banks to secure financing for you, you may see five new inquiries on your credit report, which will lower your credit score. Also, when a new loan account shows up on your credit report, it increases the amount of debt that you have, which may lower your credit score, as well.

Why Does Your Credit Score Drop When You Buy a Car?

If you buy a car and you finance your car, your credit score may drop for a variety of reasons. The main reason your credit score drops when you buy a car is that the dealership you bought your car from may have shopped for financing at several banks to obtain the best interest rate for you.

It’s not uncommon for dealerships to approach up to five banks to obtain the best financing rates for you. Every bank or lender that your dealership approaches will place a hard inquiry, commonly known as a hard pull, on your credit report. Every hard inquiry that's added to your credit report can cause a drop in your credit score that ranges from 5 to 10 points.

So, the more hard inquiries you rack up, the bigger the drop in your credit score. Hard inquiries will stay on your credit report for up to two years. After the two-year period, they will be removed from your credit report and will no longer impact your credit score.

The second reason your credit score may drop when you buy a car is that the auto loan that you took out cause an increase in the total debt that you have. Oftentimes, increasing the amount of debt that you have causes your credit score to drop. This is so because the “amounts you owe” has a 30% impact on your credit score, so adding a considerable amount of debt can cause a decrease in your credit score.

That said, although you may notice an initial drop in your credit score, making timely payments on your auto loan will increase your credit score as the account ages. So, if your credit score dropped because you bought a car, make timely payments and your timely payments will ultimately increase your credit score.

The third reason why your credit score drops when you buy a car is that opening a new loan account decreases the average age of accounts that you have. The average age of your accounts, accounts for 15% of your credit score. So, opening a new account decreases the average age of your accounts, which causes a drop in your credit score. As time passes from the date you opened your auto loan account, your average account age will increase, bringing up your credit score.

Credit Score Planet Note: Although buying and financing a car can cause your credit score to drop initially, making timely payments on your loan will ultimately increase your credit score even beyond what it was before you applied for the auto loan.

How Can You Keep Your Credit Score from Dropping When You Buy a Car?

You can keep your credit score from dropping when you buy a car by researching the best auto loans before going to a car dealership and choosing one lender with which to finance your vehicle. Apply for financing with one lender in advance and then go to the dealership with an approved auto loan. This is beneficial for two main reasons. The first reason this is beneficial because it prevents the dealership from shopping for financing with multiple banks, helping you avoid multiple inquiries. The second reason this is beneficial is because you can focus on negotiating the pricing of the vehicle without focusing on the loan for too long. Avoiding too many inquiries is great because, as mentioned previously, each inquiry that’s placed on your credit report remains on your account for two years. So, avoiding them all together is the best thing you can do to avoid your credit score from dropping due to too many inquiries being placed on your credit report.

Everything taken into consideration, if you take out an auto loan to purchase a vehicle, make all your payments on time and you should ultimately see an increase in your credit score, especially after you pay down the balance on your loan.

Credit Score Planet Frequently Asked Questions

1) Will my credit score drop if I buy a car?

If you’re financing a car or leasing it, initially taking out a loan or opening a lease account will cause your credit score to initially drop. However, if you make timely payments on your loan account, you can expect your credit score to go back up, possibly even beyond what it was prior to applying for financing.

2) Will a car loan raise my credit score?

If you take out a car loan and you make all your payments on time, you should expect your credit score to increase. However, if you miss any payments, your credit score will take a huge hit.

3) How does buying a car affect your credit score?

If you buy a car with cash, it will have no impact on your credit score. However, if you lease or finance your car, your credit score will drop initially. After a few months of making payments and paying down the balance on your auto loan, you will notice an increase in your credit score.

4) How does a car loan affect your credit?

Initially, a car loan will cause a drop in your credit score because of the hard inquiries that were placed on your credit report, as well as the increase in your account balance. However, after a few months of making on-time payments, you will notice your credit score begins to improve.

Credit Score Drop After Buying a Car

We know that not everyone has the cash to buy a car free and clear, so if you’re like most of us, you probably took out an auto loan to purchase your car. Taking out a loan to buy a car often causes your credit score to drop. You should know that the drop in your credit score is temporary. Some people have reported their credit score decreasing by as much as 50 points after obtaining an auto loan. The reason for this drop is that your dealership may have shopped at too many banks to obtain financing for you, and the second reason is that obtaining an auto loan increases your account balance, which negatively impacts your credit score. That said, if you make timely payments on your auto loan, your credit score will increase, possibly even beyond the credit score you started off with prior to buying your car.


What Does Your Credit Score Start At?

If you’re just starting to build your credit, you might be wondering what does your credit score start at? We will answer this question in much detail below. Building a good credit score is essential in the United States for anyone who plans on opening a credit card, buying a car, and ultimately by a home. So, what the starting credit score for Americans?

What Does Your Credit Score Start At?

If you have never applied for any form of credit, you have no starting credit score as your credit history simply does not exist yet. So, if you were to check your credit score before ever obtaining any form of credit, your score would simply show as unavailable. After you obtain your first credit card or auto loan, you will start to build your credit history, at which point you will have a credit score because the credit reporting bureaus will have information on which to calculate a credit score for you. So, if you hear someone saying that your credit score starts at 0 or 300, you should know that simply isn’t true because you start off with no credit score.

Once you obtain a credit card, auto loan, or home loan, you will begin building credit history. Your score will either improve or go down depending on whether you make payments on your accounts on time.

If it’s your first time applying for a credit card and you’ve never had any form of credit, your application may be denied because you have no credit history. That said, banks do offer secure credit cards. A secured card is a great tool for a person with no credit history to build his or her credit.

Regardless of where your credit score starts at, banks are willing to allow you to open a secured card, where you set the credit limit for the card by paying a security deposit on the card. The security deposit determines the credit limit of the card. For example, if you want a $1,000 credit limit, you can pay the bank a $1,000 security deposit and the bank will then issue you a credit card with a $1,000 credit limit.

Usually, if you use your card responsibly and make timely payments on the card, the bank will refund your security deposit and convert your account into an unsecured credit card. This usually takes place after one year of having the secured card and making timely payments on the card.

What is Your Starting Credit Score?

We often get asked whether a person’s credit score starts at 850 and then goes down, or whether a credit score starts extremely low, such as a 300 score and then goes up. The reality is that a person who has never applied for a credit card, has no starting credit score. So, if a person were to apply for a credit card, the lender would see no credit score and he would get a note that the credit score is unavailable. After making or not making payments for the first three to six months on your account, the credit reporting bureaus will be able to establish a credit score for you to enable lenders to evaluate whether to lend you money.

How to Build Your Credit?

Now that you know that your credit score starts with nothing showing in your credit file, how can you build your credit? We will explain a few things that someone starting off can do to build their credit. Here are some of the things you can do to start building good credit:

  • Open a Credit Card. If you are just starting to build your credit, the best thing you can do to improve your credit score is to open an unsecured credit card. Even though the bank you apply with may start you off at a low credit limit, you can build your credit by spending on the credit card and paying the card off in full. Try to spend as much as you can afford to pay off. This shows lenders that you’re a responsible borrower, only spending what you can afford to pay off. That said, if you’re not approved for an unsecured credit card, you should apply for a secured credit card. You would use the secured credit card just as you would used an unsecured credit card, the only difference is that you are required to deposit collateral with the bank issuing the credit card. For example, if you want a secured card with a $500 spending limit, you would need to deposit $500 with the bank and you would then be able to borrow up to $500 using your credit card.
  • Join as An Authorized User. If you know someone who has an account that’s in good standing and has good payment history, you can build your credit and improve your credit score by becoming an authorized user on that account. Once you become an authorized user, the account usually shows up on your credit report, and if the account has an excellent history of on-time payments, your credit score will improve as a result. However, if the primary account holder misses payments on account where you are an authorized user, your credit score may take a hit. That said, if the primary account holder does not pay the card on time, you’re not responsible for repaying the credit card.
  • Make Timely Loan Payments. If you have an auto loan, student loan, or home loan, one way you can improve your credit score is to make timely payments on such loans. Of course, if you’re just starting off with building your credit, taking out an auto loan is an easy way to build your credit and improve your credit score. If you’re applying for an auto loan for the first time, obtaining an auto loan on your own may be difficult, however, if you can find a cosigner with good credit, you may be able to get a loan. Making timely payments on your auto loan will significantly improve your credit score, especially if you’ve just started building your credit. Also, if you’re a student and you’ve taken out a student loan, making timely payments on your student loan will improve your credit score since payments on student loans are reported to the credit reporting agencies.
  • Monitor Your Credit. Monitoring your credit and addressing any negative items that are reported to the credit reporting agencies is important to improve your credit score. For example, if you have an unpaid medical bill that has been sent to a collections agency and is showing as a collections account on your credit report, you should contact the collections agency and settle the debt. Before settling the debt, you should negotiate with the collections agency to have the collections account removed from your credit report.

Frequently Asked Questions

1) What does your credit score start at when you turn 18?

A person who has just turned 18 probably has no credit cards and no loans. A person who has never applied for any form of credit will not have a credit score. This means that if you were to check your credit score, you would have no credit score because there is no information in your credit file for the credit reporting agencies to calculate a credit score for you. Your credit score will simply be unavailable.

2) what is your credit score if you have no credit?

If you have no credit, you credit score will be unavailable.

3) How long does it take to get a 700 credit score?

If you’re starting off with building credit, you can get a 700 credit score by applying for and getting a credit card. Once you have the car, spend responsibly and make timely payments on your credit card. Within a few months of making timely payments on your credit card, you should see a credit score of at least 700. The same reasoning applies if you finance a car and make timely payments on your auto loan, you will quickly see a credit score of at least 700.

4) What is a good credit score?

According to the credit reporting agencies, a good credit score ranges from 670 to 739.

5) What is your credit score if you have no credit?

If you have no credit score, you will not have a credit score. So, if you were to check your credit score, your score will be “unavailable” because the credit reporting agencies will not have any information upon which to calculate a credit score for you.

What Does a Credit Score Start At?

If you’re applying for a credit card, auto loan, or home loan, and you have never applied for a credit or loan account before, you would not have a starting credit score because the credit reporting agencies have no information on which to calculate a credit score for you, so your credit score would simply be unavailable. However, once you open a credit card or loan and make timely or untimely payments on such an account, the credit reporting bureaus will have information on which to calculate a credit score for you. So, if you were wondering what credit score do you start at, now you know that you start off with no credit score. If you have any general questions or comments, please feel free to leave them in the comments section below.


How Often Does Your Credit Score Update?

If you're like most Americans, you probably want to improve your credit score, especially if you want to apply for a new credit card or make a major purchase, such as buying a car or buying a home. Your credit score can change daily even though no changes have been made to your credit file. So, how often does your credit score update? We will discuss why your credit score may seem to keep changing and what factors cause your credit score to update.

How Often Does Your Credit Score Update?

Your credit score updates as often as the lenders you have accounts with report to credit reporting agencies, such as Experian, Equifax, and Transunion. Typically, lenders report your payment activity or lack thereof to the credit reporting agencies every 30 to 45 days, however, the exact amount of time it takes a lender to report your payment activity differs from lender to lender, so it’s hard to predict exactly when your credit score will be updated.

Also, some creditors and lenders only report to one or two of the credit reporting agencies, so not all three credit scores will change simultaneously. Furthermore, it is uncommon for a single creditor to report to all three credit reporting agencies. Usually, a credit often reports to only one or two credit reporting agencies. So, don’t expect your credit score to be updated by all three bureaus.

That said, if you apply for a credit card, car loan, home loan, or any type of credit, your credit score will be updated immediately as an inquiry will immediately be placed on your account, impacting your credit score. That said, credit scores are always changing, you might check your score on two consecutive days and see that there is a slight difference in your score even though nothing has changed on your credit report. You should not worry too much if you see small variations to your credit score as this is totally normal.

If you worried about how often your credit score updates, you shouldn’t worry too much as long as you’re making timely payments on your accounts and you’re keeping your credit utilization below the 30% threshold.

What Causes Your Credit Score to Change?

Here are some of the leading factors that can lead to your credit score changing:

  • Making or failing to make payments on your credit cards, car loans, student loans, and home loan
  • Whether you’ve paid down your balances or increased the balances on your credit cards
  • The total outstanding debt that you have on all of your accounts has either increased or decreased
  • Whether you have applied for a recent auto loan, home loan, or line of credit
  • Whether you have recently opened new credit cards or loans
  • Whether you have increased or decreased the mix of credit accounts or loan types that you have

How Long Does It Take the Credit Bureaus to Update Your Credit Score?

Credit bureaus often report updates they gets from lenders and creditors almost instantaneously.  As soon as they receive new and updated information, you will see that information reflected on your credit report. Upon receiving new information, the credit reporting agencies will recalculate your credit score and update it immediately. That said, if you have been making timely payments on your account for the past two years, and your bank reports that you made one additional timely payment, this update is unlikely to make a big difference in your credit score.

However, if you apply for a new credit card, which always results in a hard inquiry being placed on your credit report, you will likely see an immediate small drop (5 to 7 points) on your credit report. The same goes if you miss a payment on your credit card. Missing a payment can cause a significant drop in your credit score as soon as the bank reports your missed payment to the credit reporting agencies.

How Does Your Credit Score Work?

Credit card companies, lenders, and creditors typically report the status of your accounts to credit bureaus, such as Experian, Equifax, and Transunion once a month. The information that they report includes whether you’ve made a timely payment on your account, the amount by which you reduced your debt, as well as the credit limit of your account. As soon as the credit reporting bureaus receive this information, they will update your credit score and credit report. That said, it is difficult to predict when a bank or creditor will report this information as this information varies from one creditor to another. So, if you were wondering how often does your credit score update? The answers depends on when the creditor or lender sends the status of your account to the credit reporting bureaus, which differs from bank to bank.

How to Improve Your Credit Score?

If you want to improve your credit score, you should not worry about the daily fluctuations of your score and instead worry about improving your credit score in the long term. Here are some things that you can do to improve your credit score:

  • Make Timely Payments – Making timely payments on your credit cards and loans is the single most important thing that you can to improve your credit score, accounting for 35% of your credit score. So, make sure that you pay your credit cards on time and make timely payments on loans, such as your auto loan, student loan, and home loan. Making timely payments on your accounts is extremely important because it shows lenders that you’re reliable, meaning you only borrow what you can afford to pay back, which is the entire reason that we have credit scores to begin with. So, always make timely payments and you should see your credit score improve.
  • Keep Low Balances – The second most important thing you can do to improve your credit score is to pay down balances on your accounts. So, if you have a credit card that has a high balance, try to pay down that balance because this decreases your credit utilization. Having low credit utilization shows lenders that you’re not relying heavily on credit, indicating that you’re not in a financial crunch and you can therefore afford to pay down your debts. Lenders like to see a person’s credit utilization below 30%, so always try to keep your credit utilization below this threshold.
  • Don’t Apply for Too Many New Accounts – If you’re trying to improve your credit score, don’t apply for too many new credit accounts because too many applications within a short period of time will cause a significant drop in your credit score. Only apply for accounts that you need. Not only will your credit score drop because of the hard inquiries that will be placed on your account, but opening too many new accounts may lead to accumulate a lot of debt, lowering your credit score.
  • Keep Old Accounts Open – If you have old accounts, don’t close them, especially if they don’t cost you anything. This is so because closing old accounts reduces the average account age of all of your accounts, decreasing your credit score. Also, closing an account reduces your available credit, which may increase your credit utilization. So, if you have an old account, don’t close it as it may cause your credit score to drop.

How Fast Can You Raise Your Credit Score?

The answer to this question will vary from one person to another. For example, a person who has a very low credit score and begins making timely payments on his credit accounts will probably notice a significant improvement to his or her credit score. However, a person who has a high credit score will unlikely notice an improvement to his credit score simply by making timely payments on his account. So, to raise your credit score as fast as possible, you should make timely payments on your account and keep your credit utilization below 30% on every single card that you have. After making timely payments on your account, you should wait for your creditor or lender to report the changes to the credit reporting bureaus. Upon reporting the status of your account, your credit score will be updated by the credit reporting agencies.

Frequently Asked Questions

1) What day of the month does your credit score update? / How often does your FICO score update?

Your credit score can be updated several times per day. The answer to this question depends on when your creditor or lender reports changes on your account to the credit reporting bureaus. Usually, creditors and lenders send updates on a monthly basis on different days, so it is hard to exactly when your credit score updates.

2) How accurate is Credit Karma?

Most lenders prefer to look at a person FICO scoring model. However, Credit Karma uses a different scoring model known as the Vantage 3.0 scoring model. That said Credit Karma is very accurate at calculating a person’s credit score.

3) How long does it take for a credit score to go up after paying off debt?

The amount of time it takes for your credit score to go up after paying off debt depends mainly on two things. Whether your credit score is low or high and when your creditor or lender reports the changes to the credit reporting agencies. If you have a high credit score, you will likely see no change to your credit score. However, if you have a low credit score, paying off your debt may significantly increase your credit score. That said, once your pay off your debt, you should wait 30 to 40 days for your lender or creditor to report the changes to the credit reporting bureaus.

4) What is a good FICO score?

A good FICO score ranges from a 670 to 739.

5) How often does Experian update your credit score?

Experian updates your credit score as soon as new information is available on your credit file. Updates are sent to Experian on a monthly basis. Your credit score could change multiple times per day depending on when Experian gets updates from lenders and creditors.

6) How often does Transunion update your credit score?

Transunion updates your credit score whenever a lender or creditor reports the status of your accounts. Lenders and creditors often report on a monthly basis, however, the exact date varies, making answering this question difficult.


Why Did My Credit Score Drop After Getting a Credit Card?

If you’re like any of us living in the United States, then you probably want to ensure that you maintain the best possible credit score. If you have applied for or obtained a new credit card account, you may have noticed a drop in your credit score and this is totally normal. We often get asked the following question by our reader: Why did my credit score drop after getting a new credit card? We will answer this question in much detail below.

Why Did My Credit Score Drop After Getting a Credit Card?

Your credit score dropped after applying for a credit card because the bank that issued your credit card conducted a hard pull, commonly known as a hard inquiry on your credit score, which will lead to a temporary and slight drop in your credit score regardless of whether you’re approved for the card or denied.

Also, your credit score may have dropped because being approved for a new credit card lowers the overall average age of your credit accounts, which can also cause a drop in your credit score.

A third reason why your credit score may have dropped is if you performed a balance transfer at the time you applied for the credit card. The higher the balance you carry on your credit card, the more you will increase your credit utilization. An increase in credit utilization can cause your credit score to drop. The higher utilization of credit is weighed by looking at the particular card with the balance, as well as the overall or combined balances on all of your credit cards. The higher your credit utilization, the sharper the drop in your credit score.

Hard Inquiries vs Soft Inquiries

Hard Inquiry

As previously mentioned, applying for a new credit card often causes a drop in a person’s credit score because the issuing bank performed a hard inquiry. So, what exactly is a hard inquiry? And what is the difference between a hard inquiry and a soft inquiry?

A hard inquiry is a request by a card issuer to gain access to your credit report. Whenever a person applies for a new credit card, the card issuer requests a copy of your credit report. The report is used by the card issuer to determine whether they should approve you or deny your request for a new credit card.

Whenever a card issuer performs a hard pull on your credit report, an inquiry is added to your credit report. This hard inquiry will almost always cause a small drop in your credit score, however, such a drop is temporary in nature. Applying for one credit card within a short period of time is fine, but applying for many credit cards all at the same time can cause a substantial drop in your credit score.

Inquiries one your credit score makeup approximately 10% of your credit score. As such, applying for a new credit card or being approved for one should not cause a drop more than five points to your credit score. However, if you apply for too many cards at the same time, the number of points your credit score will drop will add up. If you’re thinking about buying a home, you should avoid applying for too many credit cards to keep your credit score as high as possible.

Also, applying for too many credit cards within a short period of time could signal to creditors and lenders that you’re having financial problems and so you’re resorting to credit cards for money. The best thing to minimize the impact that a new credit card has on your credit score is to use it responsibly and pay the credit you’ve used as quickly as possible.

Soft Inquiry

A soft inquiry is a pull of your credit score, however, a soft inquiry does not count against you as does a hard inquiry. Soft inquiries do not cause a drop in your credit score because you’re not applying for a specific credit product, rather, a person or company is requesting a copy of your credit score for a purpose other than extending credit.

For example, if you apply for a job, a potential employer may request a copy of your credit report, this request is known as a soft check and will not cause a drop in your score. Also, when you pull your own credit score, this is a soft pull because you’re not requesting credit. However, if you’re applying for a loan or credit card, such applications will cause a drop in your credit score. The drop in your score can be anywhere from five points to ten points.

How to Improve Your Credit Score After It Drops?

If you recently applied for a credit card and you noticed a drop in your credit score, here are a few things that you can to improve your credit score:

  • Make payments on your accounts – Making payments on your accounts keeps your credit utilization low. Keeping this ratio below 30% is recommended for the best possible credit score. So, don’t spend more than you can afford to pay off each month. This ensures that you keep your credit utilization low and your credit score as high as possible.
  • Don’t apply for more credit cards than you need – Applying for too many credit score during a short period of time can cause a drop in your credit score. So, don’t apply for too many credit cards at once as this will cause a noticeable drop in your credit score.
  • Don’t close old accounts – Closing an account can have a negative impact on your credit score because this decreases the overall age of your accounts. You want to keep old credit cards open because having an old credit card that you have made timely payments on can help your credit score
  • Pay credit cards with high balance – Credit scores are calculated by looking at the balances of individual accounts, as well as your overall account balance. So, if you have credit cards with high balances, you should pay off such accounts first to improve your credit score
  • Create a good mix of credit – Credit reporting agencies like to see that you have a variety of accounts. For example, they like to see that you have auto loans, credit cards, student loans, and home loans. They don’t like seeing a credit report that only shows, for example, credit cards. The better the mix of credit accounts, the better your score will be
  • Pay off any collection accounts – If you have any collections that appear on your credit card, you should contact the collections agency and ask them about the option of paying off the amount you owe, as well as removing the collection account from your credit report

What is the Quickest Way to Improve Your Credit Score After It Drops?

The quickest way to improve your credit score after it drops is to pay down the balances on your accounts, and if you can’t pay down the balances on your credit cards, ask your bank to increase your credit limit. Increasing your credit limit, reduces your credit utilization ratio, which can cause a decent increase in your credit score.

Also, if you have any collections accounts that show up on your credit report, you should contact the collections agency and negotiate a deal where you agree to pay the debt in exchange for them to remove the collections account from your credit report. Removing a collections account from your credit report could increase your credit score by 50+ points. That said, the increase will be different from one person to another, but we have personally seen credit scores increase by more than 50 points after a collections account has been removed.

Frequently Asked Questions We Get at Credit Score Planet?

1) How quickly can I raise my credit score?

This depends on how quickly you take action and how quickly the changes you make are reported to the credit reporting bureaus. For example, if you pay off the balances on your credit card accounts and you have any collections accounts removed, you can see a huge increase in your credit score within approximately 30 days. However, this is different from one person to another, depending on what other factors are impacting your credit score.

2) How can I raise my credit score by 100 points in 30 days?

Again, although we cannot guarantee a 100 point increase in your credit score, making payments on accounts with high balances, paying off collections accounts and negotiating their removal, as well as adding a mix of credit accounts will all help increase your credit score.

3) How fast can my credit score go up?

This answer to this question is different from one person to another. But, lets say that you pay off all accounts with high balances, and your current on all other accounts, your credit score could improve dramatically as soon as the financial institutions you have credit accounts report the changes you’ve made. Changes are usually reported at least once a month, so you could see your credit score go up within as little as 30 days.

4) Why did my credit score drop after I opened a new credit card?

Applying for a new credit score can cause a drop in your credit score because credit reporting agencies ding persons who apply for new credit. Every time a person applies for a new credit account, a hard inquiry is placed on his credit report. A hard inquiry (also known as a hard pull) decreases the applicant's credit score by a few points. That said, this drop in your credit score is temporary and your credit score will eventually recover. Make your accounts payments on time and you should notice a decent improvement in your credit score.


Is it Better to Pay Off Your Credit Card or Keep a Balance?

If you’re like any other person who lives in the US, you probably want to improve your credit score or maintain your high credit score. At Credit Score Planet, we often get asked whether it is better to pay off a credit card or keep a balance on it. There are many myths about credit scores out there, and one of them is that if you keep a balance on your credit card, you will increase your credit score. So, is it better to pay off your credit card or keep a balance on it? We will answer this below in much detail.

Is it Better to Pay Off Your Credit Card or Keep a Balance?

It is better to pay off your credit than keeping a balance on it. The credit report agencies like to see people who only use as much credit as they can afford to pay off at the end of every month. So, paying off the balance on your credit card will help your credit score.

Leaving an unpaid balance on your credit card will not help your credit score. If anything, leaving an unpaid balance may hurt your credit score because it causes an increase in your credit utilization ratio, which is something that has the potential to reduce your credit score.

So, if you were wondering whether to pay off your credit cards or leave a balance on them, it is always best to pay them off.

Also, experts have agreed that keep your overall credit utilization below 30% is the best way to ensure that your credit score does not decrease. Exceeding a 30% credit utilization may cause a substantial decrease in your credit score. This is true when it comes to your overall credit utilization, as well as utilization of an individual credit card account. So, always try to keep your utilization below this threshold.

How Much Can Paying Off Your Credit Card Improve Your Credit Score?

Paying off your credit card instead of keeping a balance can substantially improve your credit score. This is especially true if you have utilized a significant portion of your overall available credit or the overall portion of your available credit for the specific credit card account.

This is so because keeping your credit utilization below 30% on individual accounts, as well as your overall credit utilization is considered as an important factor by credit reporting agencies when calculating your credit score. So, staying beyond this threshold shows creditors and lenders that you’re borrowing responsibly and that you’re not credit hungry.

So, if you pay off a significant portion of your balance, your credit score may and probably will increase once the paid off balance is reported by your bank to credit reporting agencies, such as Experian, Equifax, and Transunion. That said, if you make small payments and eventually pay off your balance, you may notice small and incremental changes to your credit score as pay off the balances for your credit cards. If you want to see a significant jump in your score, you should pay off big chunks of the debt that you owe.

After paying off your credit cards and improving your credit score, to maintain the improvement in your score, you should keep the accounts that you’ve paid off open and in good standing. This is so because closing an account that’s in good standing will decrease the overall age of your credit accounts, as well as cause your credit utilization to increase. So, keep making payments on your account, and keep it open.

Your Credit Card Payment History

The single most important factor in calculating your credit score is your payment history. So, ensuring that you make timely payments on your accounts, including credit cards is the best thing you can do to improve your credit score or maintain it. One way you can establishing a strong payment history is to make small purchases using your credit cards, and paying your cards in full and on time every month. Also, if you haven’t been paying off your credit cards, on way to improve your credit score is to pay your credit cards to make them current.

Does Paying Off Your Credit Card in Full Increase Your Credit Score?

Paying off your credit cards in full is always the smart thing to do because it shows lenders and creditors that you’re only using as much credit as you’re able to pay off. Also, paying off your credit card in full means that you won’t have to pay interest on the money that you’ve borrowed. So, does paying off a credit card in full increase your credit score? Yes, paying off a credit card in full can increase your credit score, especially if you have used a significant portion of your credit limit. Although paying a credit card in full is not necessary to maintain a good or excellent credit score, paying the minimum payment on time will help you build a good credit score as this shows lenders that you’re able to pay off the amount of money that you’re borrowing on time.

Why is Leaving a Balance on Your Credit a Bad Thing?

Leaving a balance on your credit card is a double-edged sword because although it shows creditors that you’re regularly making payments on your credit card accounts, it shows creditors and lenders that you’ve used more credit than you can afford to immediately pay off, meaning this can show creditors that you’re having money problems since you can’t completely pay off your account.

Also, from your own perspective, when you leave a balance on your credit card, you’re paying interest on the money you’ve borrowed. The interest can become a problem if you have borrowed a large amount of money on your account. Oftentimes, by the time you pay off an account, you may have ended up paying double the amount of money that you’ve borrowed.

Paying off an account in full makes you look better in the eyes of the credit reporting agencies, as well as creditors and lenders. Paying off a balance in full shows them that you have the ability to borrow money and pay it off entirely, reducing the chances that you have money problems.

So, if you believed that carrying a balance on account is a good thing and that paying it off in small chunks over time will improve your credit score, you should know that paying off the balance entirely will have a bigger and better impact on your credit score, especially if you do this often.

How to Build and Maintain Credit?

To build and maintain a good credit score, you need to show lenders and creditors that you have the ability to borrow money and pay off the money as agreed. Repeatedly borrowing money and paying it off in full is the best way to build a good credit score. Payment history represents the biggest chunk of every American’s credit score, so ensuring that you make timely payments on your accounts is the best way to improve and maintain your credit score. Missing even one payment can have a devastating impact on your credit score. Typically, making a late payment won’t hurt your credit score unless the creditor reports your missed payment to one of the three major credit reporting bureaus. Creditors do not often report an account unless the payment is more than 30 days late. So, if your late on making a payment, make sure that you make your payment within 30 days of the due date so that it’s not reported to the credit reporting agencies.

Frequently Asked Questions

1) Should you pay off your credit card immediately or over time?

The advice of experts is to spend as much money on your credit cards as you can pay off in full at the end of the month. Paying off a credit card in full immediately shows creditors that you’re only borrowing as much money as you can afford to pay off. So, if you have a credit card balance and you have the ability to pay it off, you should pay it off entirely as this will maximize your credit rating.

2) Should I pay off my credit card in full?

Yes, if you have the ability to pay of a credit card in full, you should do so, as this makes you look reliable to creditors and lenders because it shows them that you’re only utilizing as much credit as you can afford to pay off.

3) Having a credit card with a zero balance

Having a credit card with a zero balance especially after paying off your credit card is seen as a positive factor by credit reporting agencies and creditors because it shows them that you’re borrowing responsibly. To improve your credit score, makes small purchases or purchases that you can afford to pay off entirely, and zero out your balance at the end of the month to improve and maintain a good credit score.

4) What happens if I don’t pay my credit card balance in full?

If you don’t pay off your credit card balance in full, make sure to make the minimum payment, at least. If you can pay off more than the minimum payment, this is better. Paying off as much of your account is the best thing you can to do to improve your credit score. This is so because decreasing your credit utilization generally improves one’s credit score.

5) When should I pay off my credit card?

Ideally, you should pay off your credit card entirely as soon as you’ve used credit. However, we understand that life happens and not everyone has the ability to make full payments on their credit cards, so make sure that you at least make the minimum payment, and if you can, trying to make as big of a payment as possible. This shows creditors that you can pay off your account as agreed and that you’re borrowing responsibly.


Why Did My Credit Score Go Down?

If you’re like most Americans, you probably periodically check your credit score to make sure that nothing bad is impacting your credit score. But, one day, you check your credit score, and you find out that it has done down. What could cause your credit score to go down? This post will answer one of the most commonly asked questions that we get: Why did my credit score go down? We will answer this question in much detail below.

Why Did My Credit Score Go Down?

Your credit score may go down for a variety of reasons, such as: you missed a payment on one of your accounts, your utilization of credit increased, a collections account was reported to one of the credit bureaus, you closed an old account, or a credit inquiry was added to your credit report as a result of applying for a new credit card, home loan, or auto loan. To determine what's causing your credit to go down, you should check your credit report to see what's dragging it down.

That said, there is no need to panic if your credit score has gone down a few points as it's common for your credit score to fluctuate and the fluctuation is not necessarily indicative of something serious. However, if your score dropped significantly (30+ points), this might be a sign that something serious is impacting your credit score, and you should take action to undo the damage that has been done to your credit score.

Normal Events that can Cause a Small Drop in Your Credit Score

Here is a list of events and things that can cause a small drop in your credit score.

1) An increase in your credit utilization

An increase in your total credit utilization can result in a slight drop in your credit score. Credit utilization is calculated by adding all of your credit card balances and dividing them by your total credit limits and then multiplying the number by 100. For example, if you have 2 credit cards: one card with a $6,000 credit limit and another credit card with a $4,000 credit limit, and you have used $1000 on each of the credit cards, your credit utilization can be calculated by adding your balances ($1,000 + $1,000 = $2,000) dividing this number by your credit limits ($6,000 + $4,000 = $10,000) = ($2000 / $10,000) = .20 x 100 = 20% Credit utilization.

If your credit utilization increases to let’s say 30%, this could cause your credit score to drop by a few points. However, if your credit utilization increases significantly, you may see a bigger drop in your credit score.

Experts recommend that people keep their credit utilization below 30%. Anything higher may adversely impact your credit score. That said, carrying a high balance on a credit card is not a huge problem because the moment you pay down your balance, your credit utilization will decrease, and your credit score will go back up.

2) You closed a credit card account

Closing a credit card account can and probably will hurt your credit score, especially if you have had this account for a long period of time. Closing such an account that has been open for a long period of time will hurt your credit score because it decreases the average age of your accounts, as well as decreases the total amount of available credit that you have. These are two things that are factored into your credit score. That said, even if your credit score decreases because you’ve closed a credit card, your credit score is likely to increase and go back up within a couple of months.

3) You paid off your car loan

Most people think that paying off their car loan should increase their credit score, but some are surprised when they see that their credit score has instead decreased. This often occurs because the credit bureaus like to see a mix of credit. Paying off a car loan may reduce the diversity of your credit accounts, thus causing a decrease in your credit score. You should not worry about such a decrease because it’s probably a small decrease and does not signify anything wrong with your credit.

4) You paid off your student loan

The same reasoning for paying off a car loan applies to pay off a student loan. Paying off a student loan may decrease your credit diversity, thus decreasing your overall credit score.

5) You recently applied for a new credit card

Typically, when a person applies for a new credit card, the financial institution at which you applied for a credit card will pull your credit report, this is commonly known as a hard pull or a hard inquiry. One hard pull is unlikely to cause a significant drop in your credit score, but applying for too many credit accounts within a short period of time may have a significant impact on your credit score because it shows that you’re desperate for credit and that’s not something credit bureaus like. That said, don’t panic as a hard pull typically results in a 5 point drop in your credit report and only remains on your credit report for 2 years, at which point it’s removed.

6) You recently purchased a new car that you’re leasing or financing

Purchasing a new car can have a slight negative impact on your credit score for two main reasons. The first reason is that when a person purchases a vehicle and wants to finance it, the dealership might go to a few banks for financing the car loan. This means that the banks will perform a hard pull on your credit report. A hard pull can decrease your credit score by as many as seven points. The second reason purchasing a car can slightly decrease your credit score is because it increases your total debt, which could cause a slight decrease in your credit score. However, as you make payments on your new car and decrease the amount of money you owe, your credit score will go back up, if you’re make all your payments on time, you might be left with a higher credit score than when you first purchased your vehicle.

Serious Events that can Cause a Significant Drop in Your Credit Score

1) You missed a payment on one of your credit accounts

Missing a payment on one of your credit accounts, such as a car payment or credit card payment Is one of the worst things that you can do for your credit score. That said If you're a little late on making a payment, such as five to ten day, don't worry too much because large credit card companies usually don't report late payments unless they're late for more than 30 days. That said, If you make a late payment, the lender may charge you late fees but your credit score should be fine so long as you make the payment within the 30 day window. A late payment on a credit account Is a big deal when It comes to your credit score. One late payment can reduce your credit score by up to 100 points. So, If you happen to miss a payment, make sure that you try your best to continue making payments so that your credit score slowly but steadily Improves.

2) Applying for several credit cards or loans at the same time

Applying for several credit cards can lower your score because each time you apply for a credit card, you are authorizing the lender to make a hard Inquiry, commonly known as a hard pull on your credit report. On average, a hard Inquiry decreases your credit score by approximately five points. So, If you apply for ten different credit cards within a short span of time, you could decrease your credit score by approximately 50 points. The best thing to do when looking for a credit card Is to fine one card that has the features you're looking for and apply for just that one card. Also, If you happened to apply for a bunch of cards, don't worry that your score has decreased as hard Inquiries will only be on your credit report for approximately two years, and you should see the Impact of hard Inquiries begin to disappear after approximately one year.

3) A collections account being reported to a credit bureau

Having a collections account appear on your credit report can hurt your credit score by a lot. Some accounts can hurt by 50 points while others can hurt up to 70 or 100 points. Also, the newer a collections account, the more It will hurt your credit score. Collections accounts will usually appear on your credit account for up to seven years from the date of your delinquency. The newest version of FICO scoring does not allow a paid collections account to hurt your credit score. So, If you have a collections account, the best thing you can do to negate the Impact of a collections account Is to pay the collections the sum you owe them. Also, you might want to try to negotiate the removal of the collection account from your credit report. It's a smart decision to do this before paying them because you have leverage. They want money and you want the collections account off your credit report.

4) A charge-off on your credit report

A charge-off Is an event where a bank decides that a debt Is not collectively from the debtor. Bank typically charge off credit card debt after It has been delinquent for 180+ days (6 months of nonpayment). When a financial Institution charges off your debt, they report the charge-off to the major consumer credit reporting agencies. A charge off can have a significant Impact on a debtor's credit score. A single charge off can drop a person's credit score by 100+ points. So, If you have an account that Is bad standing and has been delinquent for a few months, It's best to negotiate with the lender and attempt to pay off the debt before the bank charges It off.

5) Filing for Bankruptcy

Filing for bankruptcy Is probably the worst thing that a person can do to his or her credit score. It Is a significant event and credit reporting agencies will ding you for filing for bankruptcy. If you have a credit score that's above 700, filing your bankruptcy could reduce your credit score by over 200 points.

6) Foreclosure of your home

Foreclosure of your home Is a big event that will have a huge Impact on your credit score. If you have a credit score of 700, a foreclosure on your home could cause an 80 to 100 point drop in your credit score.

Frequently Asked Questions at Credit Score Planet

1) Why Did My Credit Score Go Down Without Anything Changing?

Your credit score may go down for a variety of reasons. Each one of the credit reporting agencies uses a different scoring model. For example, If your credit utilization Increased, your score may decrease slightly even though nothing adverse Is showing on your credit report. Ensuring that you keep your credit utilization (total credit card balance) below 30% of your credit limits Is the best way to ensure little fluctuation of your credit score. Another reason for your lower score may be that you closed an account, which can Impact your credit score In two ways. First, It may have decreased the mix of credit accounts that you have. The second reason Is that It was an old account that had a lot of credit history and by closing the account you decreased the average age of you’re accounts. There are a variety of other reasons why your credit score fluctuates. See the Items above for more Information.

2) How Much Will My Credit Score Go Up If I Get a Collections Account Removed from my Credit Report?

The removal of a collections account will cause your credit score to significantly go up. From personal experience, I have recently removed a collections account that caused my credit score to go up by 80 points. Some have reported credit score Increases of 100+ points. So, It really depends on your own credit rating, but rest assured, removing a collections account from your credit report will have a dramatic Impact on your credit score.

3) Why Did My Credit Score Drop?

Again, your credit score can drop or go down for a variety of reasons that we have covered throughout this post. Some things can cause your credit score to drop slightly, whereas other things can cause a significant drop in your credit score. See the above-listed reasons for your credit score dropping.