Why a 10-Point Drop in Your Credit Score Doesn't Matter U.S.News & World Report Tuesday, April 21, 2015
In the last few years, consumers have experienced a significant increase in exposure to credit scoring. Suddenly, websites and credit card companies are offering access to free credit scores. While these scores are often "FAKO" scores (similar to, but not exactly, the original FICO score) they still offer a way to keep tabs on financial health. But this increased access has also led to irrational paranoia about maintaining the highest possible credit score and the ramifications of a small drop in points.
Your Credit Score Isn't a Trophy
A great credit score may earn a person bragging rights with financially savvy cohorts, but what's the point of having a great score and not using it for personal gain?
The entire reason to develop a strong credit score is to keep the rest of your financial life affordable. Refusing to apply for credit -- especially if it means consolidating debt, decreasing interest rates or making you eligible for the best rewards -- is nonsensical. Why have a great score if you aren't going to use it to make your life affordable? A credit score isn't a trophy to be kept on a mantle. It's meant to be used as leverage when you need a loan or want the best rewards credit card on the market.
Don't Let a Potential Drop Cripple You
It's common for people to resist applying for credit, such as a balance transfer credit card or a personal loan to refinance student debt, because it will cause a dip in a credit score.
If taking out a balance transfer could help you dig out of debt faster, a personal loan for home renovations could increase your house's value in a sale or refinancing student loans could save you thousands in interest -- take the credit score drop!
A 10 to 20 point drop in a credit score to get a better financial product is worth the hit. It also doesn't take very long for those points to be recouped if you continue to use credit wisely.
Not to mention, the loss of points is irrelevant if you stay within the same credit range after the drop occurs.
Understand the Ranges
Credit scores come in various ranges including bad, average, good and excellent. The FICO score, which is the original and most commonly used score, ranges from 300 to 850. Other scores include the Vantage Score and the unique scores from each of the three credit bureaus. Regardless of scoring model, consumers should
strive for 700 or higher to qualify for quality financial products. Here's a closer breakdown:
-- 750 or higher is often considered excellent and earns a borrower access to the lowest interest rates and best deals on borrowing.
-- 680 to 749 is considered good, with borrowers earning access to good credit cards and competitive interest rates on loans.
-- 600 to 679 is considered average, but borrowers in this range will not be eligible for top-tier credit cards and may often be declined for loans.
-- 300 to 599 is considered poor or bad, and usually means a borrower will struggle with finding access to quality credit and may turn to payday lenders or title loans .
It's important for consumers to be within the good to excellent ranges. But keep in mind that even an 800 credit score doesn't guarantee you'll be approved for a loan or credit card.
Lenders Use More Than Your Score
A credit score is an important indicator a lender uses to determine whether a potential borrower is a safe bet, but a credit score isn't the only determining factor. Lenders create unique underwriting models to determine risk, which may include: debt-to-income ratio, savings, employment status, recent applications for loans or credit, and if a consumer has tax liens or declared bankruptcy.
The Exception(s) to the Rule: When 10 Points Matters
As with most rules, there are exceptions. In this case, there are times when a 10-point drop in a credit score does matter.
Don't seek new credit if you're planning to apply for a mortgage in the next six to nine months. You want your score at the highest possible level so you can get the absolute lowest mortgage rate.
You should also be wary of a drop in your credit score if it will demote you into average or poor credit score ranges. A 680 credit score is right on the cusp, and it's preferable to achieve a 700 before applying for a personal loan, balance transfer or other type of credit.
You could minimize the risk of rejection by checking with your bank if you're preapproved for a credit card. You could also apply for a personal loan that results in a soft inquiry of your credit report to give you interest rates. A soft pull or checking preapproval will not harm your credit score.
Erin Lowry writes about personal finance and manages social media for MagnifyMoney.com. a site dedicated to helping consumers save money by finding simple, transparent financial products. She is also the founder of the personal finance blog Broke Millennial.