Finanzas / Finances The Yo-Yo Effect of Credit Scores by

MILAGROS S. JOHNSON

The most common question asked by consumers is, “Why does my credit score keep going up and down?” My immediate thought is the “Yo-Yo Effect” we don’t always talk about, or perhaps understand. In this month’s column, I will provide you with a simple and clear explanation of what effects your credit score. I hope that once you have a clearer understanding of how the credit score works, you will make better informed, and careful decisions on how far to extend (or not extend) the “yo-yo.”

Your credit score is a three-digit number (300 to 850) that represents your credit worthiness. The higher the number, the better your credit rating, which means you will qualify for the lower interest rates when applying for loans or credit cards. So how do you get there? Let me explain what impacts your credit score to drop, in a way that breaks down the five factors that impact your credit score, good or bad…

1. Payment History (35%): Making a late payment on one of your credit accounts can have the most adverse effect on your credit rating. In fact, 35% of your credit score is based on your payment history. Make two late payments, and your score will drop even more.

2. Amount Owed (30%): Overextending yourself on your credit limit has a 30% effect on your credit score. In other words, lenders consider you to be a higher-risk for defaulting when using more than 30% of your credit limit. Therefore, to avoid that 30% drop, keep your credit utilization below 30% to avoid the significant drop.

3. Length of Credit History (15%): Old credit is good! Why? Because the length of your credit history is 15% of your score. So, before you close that old inactive credit card account, think again and consider keeping it open (and active) to avoid losing 15% of your credit score.

4. New Credit: (10%): Each time you apply for a loan or credit card, your score drops by 10%. One way to decide on whether or not to take the plunge is by asking yourself, “Is the 10% drop worth it? Should I risk the hard inquiry on my credit?”

5. Credit Mix: (10%): There are two types of credit accounts which make up the mix, revolving accounts (i.e., credit card, retail store) and installment accounts (i.e., mortgage, auto loan). The best practice is to limit the mix to avoid the 10% drop.

For those who have a low credit score, know that your score is constantly evolving based on your credit usage, for instance. By adhering to the five factors, combined with your dedication and discipline, you will reach a healthier financial well-being and credit score, and gain total control of the yo-yo effect

For more information, or to speak with a Consumer Specialist, call (413) 787-6437 or email us at moci@springfieldcityhall.com.

MILAGROS S. JOHNSON is the Director of the Mayor’s Office of Consumer Information in Springfield, a Local Consumer Program funded by the Massachusetts Attorney General’s Office.

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