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A credit score is one factor used in a lender’s assessment of your creditworthiness when you apply for a lending product, such as a loan, line of credit, or credit card. It can also be a factor in lease approval, new utilities setup, and insurance rates. You can have more than one credit score, depending on what credit scoring model a lender uses.

One type of credit scoring model is the FICO® Score, which is used by 90% of top lenders in the U.S. Since it’s such a widely used determiner, consumers are wise to pay close attention to their own score.

What Is a Credit Score?

Consumers often use the words “credit score” to refer to FICO credit scores, but a credit score could be one of several scores. Generally speaking, credit scores are created with a mathematical formula that weighs different financial behaviors to arrive at a three-digit score that summarizes a consumer’s creditworthiness. Each of your credit scores depends on the formula used to calculate it and they may vary depending on which information about you was pulled into the formula and how different behaviors, such as your bill-paying history and unpaid debt level, were weighted.

What Is a FICO Score?

Let’s look specifically at the FICO Score, since it is so often used by lenders. The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores, like other credit scores, compress a person’s credit history into one algorithmically determined score.

Because FICO Scores (and other credit scores) are based on analytics rather than human biases, the intention is to make it easier for lenders to make fair lending decisions.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options.

What Is the FICO Score Range?

FICO’s base range is 300 to 850: The higher the score, the lower the lending risk a lender might consider you to be. The FICO Score is divided in this way:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of what affects a FICO Score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

About two-thirds of your base FICO Score depends on managing the amount of debt you have and making your monthly payments on time. Each of the three major credit bureaus — Experian®, Equifax®, and TransUnion® — supply information for the calculation of your credit score, so it can vary slightly even if your creditworthiness doesn’t fluctuate.

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO Scores used by mortgage lenders. There is also an UltraFICO Score for consumers with limited credit histories that factors other banking behaviors into the tabulation.

Industry-specific FICO Scores range from 250 to 900, compared to the 300 to 850 range for base scores.

What Is a Good FICO Score?

Strictly referencing the base FICO Score range, a “good” score is between 670 and 739 on the overall scale of 300 to 850.

But what’s considered acceptable for credit approval might vary from lender to lender. Each lender has its own requirements for credit approval, interest rates, and loan terms, and may assign its own acceptable ranges. Lenders may also use factors other than a credit score to determine these things.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Why Is a FICO Score Important? What Is a FICO Score Used For?

As mentioned above, the FICO Score is used by 90% of top lenders in the U.S. When a consumer applies for a loan or other type of credit, the lender will look at their credit report and credit score. If there are negative entries on the credit report, which may be reflected in a decreased FICO Score, the applicant may not have a chance to explain those to the lender. Especially in mortgage lending decisions, the lender may have a firm FICO Score requirement, and even one point below the acceptable number could result in a denial.

But what if you’re not applying for credit in the traditional sense? Your FICO Score is still an important number to pay attention to because it’s used in other financial decisions.

•   Renting an apartment. Landlords and leasing agents generally run a credit check during a lease application process. They may or may not look at the applicant’s actual credit score — landlords have a lot of flexibility in how they make leasing decisions — but they do tend to look at the applicant’s credit history and how much debt they have in relation to their income. Both of these factors go into a FICO Score calculation.

A few late payments here and there may not affect your ability to rent an apartment, but a high debt-to-income ratio may. If you have a lot of income going toward debt payments, the landlord may be concerned that you won’t have enough income to pay your rent.

•   Insurance. One of the industry-specific FICO Scores is formulated for the insurance industry (think auto insurance and property insurance). Insurers will typically look at more than just a person’s FICO Insurance Score, but it is one factor that goes in determining qualification for insurance and at what rate. The assumption is that a person who is financially responsible will also take more care when it comes to their home and car.

•   Utilities. You may not think of a utility bill as a debt, but since utilities like gas, electric, and phone are billed in arrears, they technically are a form of debt. (“Billed in arrears” means that you are billed for services you have already used.) Utility companies want to make sure that you will be able to pay your monthly bill, so they may run a credit check, which may or may not include looking at your FICO Score.

Recommended: What Credit Score Is Needed to Rent an Apartment?

What Affects Your FICO Score?

We briefly touched on how a FICO Score is calculated, but what goes into those different categories? Let’s look at those in more detail.

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? “Payment history makes a bigger impact on a person’s credit score than anything else — 35%,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “So the most important rule of credit is this: Don’t miss payments. Timely payments are crucial, and making at least the minimum payment on a revolving credit line can make a positive impact on a person’s credit score.”

Both installment (personal loans, mortgage loans, and student loans, for example) and revolving credit such as credit cards can affect your payment history. Since it’s such an important factor, how can you make sure it’s a positive one for you?

•   Making payments on time, every time, is the best way to make sure your payment history is a positive one. Having a regular routine for paying bills is a good way to accomplish this.

•   Automating your payments may help you make at least the minimum payment on credit accounts.

•   Checking your credit report regularly for errors or discrepancies can help catch things that might have a negative effect on your FICO Score if left uncorrected. You can get a free credit report from each of the three credit bureaus once per year at AnnualCreditReport.com.

Amounts Owed (30%)

The amount of debt you owe in relation to the amount of debt available to you via your various lines of credit is called your credit utilization ratio, and it’s the second-most important factor in the calculation of your FICO Score. Having debt isn’t at issue in this factor, but using most of your available debt is seen as relying on credit to meet your financial obligations.

Credit utilization is based on revolving debt, not installment debt. If you’re keeping your credit card balance well below your credit limit, it’s a good indicator that you’re not overspending. If you have more than one credit card, consider the percentage of available credit you’re using on each of them. If one has a higher credit utilization than the others, it might be a good idea to use that one less often if you’re trying to positively impact your FICO Score.

Length of Credit History (15%)

This factor’s percentage may not be as high as the previous two, but don’t underestimate its importance. As with payment history, lenders tend to look at a person’s credit history as predictive of their credit future. If there is no credit history or short credit history, a lender doesn’t have much information on which to base a lending decision.

Since the amount you owe is such an important factor in your FICO Score, you might think that paying off and closing credit accounts would have a positive effect on your score. But that might not be the best strategy.

Revolving accounts like credit cards can be a useful tool in your financial toolbox if used responsibly. A credit card account with a low balance and good payment history that has been part of your credit report for many years can be an indicator that you are able to maintain credit in a responsible manner.

Installment loans like personal loans are meant to be paid off in a certain amount of time. The account will remain on your credit report for 10 years after it’s paid off.

Paying off a personal loan is certainly a positive thing, but paying off a personal loan early could cause the account to stop having that positive effect earlier than it otherwise would.

Credit Mix (10%)

Having multiple types of credit can have a positive effect on your FICO Score. Being responsible with both revolving and installment credit accounts shows lenders that you can successfully manage debt.

•   Revolving accounts are those that are open-ended, such as a credit card. You can borrow money up to your credit limit, repay it, and borrow it again. As long as you’re conforming to the terms of the credit agreement, the account is likely to have a positive effect on your credit report and, therefore, your FICO Score.

•   Installment accounts are closed-ended. There is a certain amount of credit extended to you and you receive that money in a lump sum. It’s repaid in regular installments over a set period of time. If you need additional funds, you must take out another loan. A personal loan is one example of an installment loan.

Credit mix won’t make or break your ability to qualify for a loan, but having different types of debt indicates to lenders that you’re likely to be a good lending risk.

New Credit (10%)

Though lenders like to see that a person has been extended credit in the past, too much new credit in a short amount of time can be a red flag.

When you apply for a loan or other type of credit, the lender will typically look at your credit report. This is called a credit inquiry and can be a hard inquiry or a soft inquiry. A soft inquiry may be made by a lender to pre-qualify someone for credit or by a landlord for a lease approval, for example.

During a formal application process, a lender might make a hard inquiry into your credit report, which can affect your credit score. FICO Scores take into account hard inquiries from the last 12 months in your credit score calculation, but a hard inquiry will remain on your credit report for two years.

💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

FICO Score vs. Credit Score

As we’ve seen, these two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness. One of the more commonly used alternatives to the FICO Score is the VantageScore®.

FICO Score vs. VantageScore

You won’t always know which credit score a lender is using to assess your qualifications as a borrower. But if it isn’t a FICO Score there is a good chance it’s the VantageScore. (Some lenders feed both FICO and VantageScores into their own proprietary scoring tool.) The VantageScore was created by the three nationwide credit reporting agencies — Equifax, Experian and TransUnion. Like the FICO Score, it has a range of 300 to 850. The formula for computing a VantageScore is slightly different from that for a FICO Score, but working to polish one will likely have a positive effect on the other.

How to Positively Impact Your FICO Score

Good credit hygiene can have a beneficial effect on your FICO Score that spills over into other types of credit scores as well. As you think about what affects FICO Score, here are some steps to take:

•   Check your credit reports. Request corrections for any errors you find (they do occasionally happen). You can

•   Pay your bills on time. Set up automatic payments from your bank account to make sure nothing slips through the cracks.

•   Avoid maxing out credit cards or lines of credit. If you tend to use one card to the max, put it on ice for a while and reach for a different card, if you have one. Or request a larger credit limit on the card you tend to overuse — assuming, that is, that you are keeping up with your payments.

•   Diversify your credit mix. If you use credit cards for everything, even cash advances, consider a personal loan the next time you need a larger sum for a significant expense. Personal loans often have lower interest rates than credit cards anyway.

The Takeaway

Your FICO Score is affected by how you manage your personal finances, whether that’s a personal loan, line of credit, credit card, or other type of credit product. Although it’s not the only credit score lenders use, it is the one used in the majority of lending decisions in the U.S. Personal loans are one financial tool that can be used to add some variety to your credit mix. If managed responsibly with regular, on-time payments, your FICO Score could be positively affected by having an installment loan like this in the mix.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is a FICO score the same as a credit score?

It’s common to wonder what is a FICO Score vs. a credit score. The two are not the same thing, although a FICO Score is one of the most commonly used types of credit score. Each type of credit score has its own distinctive scoring model. They all aim to distill a consumer’s financial behavior into a number that lenders factor into their decision about whether to loan to the consumer.

What is considered a good FICO Score?

A “good” FICO Score falls between 670 and 739 on a FICO Score range that runs from 300 to 850.

Why do I have multiple credit scores?

Everyone has multiple credit scores because there are different data analytics firms and agencies that compile information about consumers’ credit history. Within many of these organizations, there are also different types of credit reports for different purposes. There are FICO Scores, for example, that are tailored to auto loans and insurance industry needs.

Does checking your credit score lower it?

Checking your credit score — even doing so multiple times — will not damage it. Requesting a copy of a credit report will also not damage your credit score.

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Getting a credit card with no deposit can be easy if you have an established credit history with a good or excellent credit score. But if you’re just establishing your credit history or are trying to build your credit score, it can be much more challenging to apply for a credit card with no deposit.

For some, a secured credit card (one requiring a security deposit) might seem like the only option, but there are other paths to building your credit history. In this guide, we’ll cover how to find and apply for credit cards with no deposit — and what steps you can take to get closer to approval if you’re being denied.

What Is a Credit Card Security Deposit?

Because of their established credit history and decent credit scores, many borrowers can open credit cards with no money down (nor any other kind of collateral). This is called an unsecured credit card. However, if you don’t have any credit history or have a low credit score, you might find that credit card issuers will only offer you a secured credit card — meaning it requires a security deposit.

A credit card security deposit is refundable and often equal to the value of the credit limit on the card. Typically, the deposit amount ranges from $50 to $300.

While going this route can’t help you with unexpected expenses (as with a debit card, you are technically only able to spend money you already have), it can be a good way to build credit. However, you’ll want to ask the card issuer if the company reports to the credit bureaus, just to ensure it does.

Eventually, you may be able to graduate to an unsecured card if you consistently make on-time payments — one of the cardinal credit card rules.

Applying for a Credit Card With No Security Deposit

Applying for a secured credit card requiring a deposit might not be appealing to every potential borrower, especially because you need the money for the deposit upfront. These cards also typically have higher interest rates and fees. Fortunately, you have other options when shopping for a credit card.

Checking Your Approval for a Card

There’s no such thing as guaranteed credit card approval with no deposit. However, if you’re receiving emails or snail mail with credit card offers saying you’re preapproved, you might find success when you apply. You’ll still have to go through the formal application process and could ultimately get rejected, but getting a preapproved offer is a helpful step toward getting a credit card.

You can also proactively check your approval for a credit card online. Take a look at your credit score and then search online for offers for credit cards with no deposit that include your credit score in their target range. Studying this credit card guide can help ensure you understand all the finer points of credit cards before you apply.

Becoming an Authorized User

If you aren’t having success getting approved for a credit card on your own, ask a parent, family member, or trusted friend about being an authorized user on their credit card. As an authorized user, you’ll receive a credit card with your name on it and can use it like a traditional credit card, but you will not be the primary account holder.

The primary account holder is the one responsible for making on-time payments and monitoring credit usage. As an authorized user, you won’t have control over things like credit limit, and the primary cardholder can even set spending limits on your card.

However, if the primary cardholder uses the credit card responsibly — making regular, on-time payments and keeping credit utilization low — you will likely see a positive impact on your own credit score. Eventually, your score might be positively impacted enough for you to try applying for your own card again.

If someone makes you an authorized user on their card, however, it’s important to pay them what you owe each month. Never rack up credit card charges beyond what you’ve discussed with the cardholder. If you abuse your card privileges, it could affect your credit score and the score of the account holder — and the friend or family member will be solely liable for paying off your debts.

Getting a Student Credit Card or a Subprime Card

If the thought of affecting someone else’s credit score as an authorized user makes you uncomfortable, you aren’t out of options. You might be eligible to apply for a student card or a subprime card.

•   Student credit card: Most student cards do not require a security deposit and are designed for students who have no credit history. Some cards might even offer cash-back rewards and no annual fees. However, as the name implies, you must be able to prove you are a student as part of the application process.

•   Subprime credit card: A subprime card is an unsecured card (i.e., no-deposit card) designed for borrowers with bad credit (generally a score below 580 in the FICO^® score model). While subprime credit cards provide a way for bad-credit borrowers to get a credit card with no deposit, they often come with their own drawbacks. Typically, subprime cards charge an application fee; some might have annual or even monthly fees. Credit limits tend to be low.

Transitioning to an Unsecured Card

If you have no luck with a student or subprime card and can’t become an authorized user, you may need to consider applying for a secured credit with a deposit after all. Although it might not be ideal, it can be a good first step toward building your credit history.

If you make regular on-time payments, the credit card issuer might eventually transition you to an unsecured card. Alternatively, you can be proactive: After building your credit history and score over several months with a secured credit card, you can apply for a credit card with no deposit through another issuer. You might find that you’re more successful this time around.

Recommended: When Are Credit Card Payments Due

What to Know About the Effects of Your Credit Score

An unsecured credit card can potentially affect your credit score if the credit card issuer reports to the credit bureaus. Before opening a credit card with a security deposit, ask the issuer if it reports to the bureaus.

If the card issuer does report, regular on-time payment could build your score over time. On the flipside, late or missed payments could adversely affect your score.

Getting a No-Deposit Credit Card: What You Should Know

So, should you get a no-deposit credit card? In general, these unsecured cards offer greater flexibility at the start because you aren’t required to pay a security deposit.

However, opening a credit card of any type is a big decision — and not one to be taken lightly. It’s important to consider the potential effects of opening a credit card and to be aware of how much a credit card costs. For example, if you max out a credit card with a high interest rate, you might find yourself drowning in the fast-growing debt it creates.

Before opening a no-deposit credit card (or any credit card), think about the implications it can have on your finances. You might consider alternate ways of establishing credit, like credit-builder loans or even small personal loans.

However, these options don’t offer some of the same perks and protections that a credit card does, such as credit card chargebacks. If a credit card feels like the right step for you, begin your research process online.

Recommended: What is a Charge Card

The Takeaway

Credit cards without a security deposit, called unsecured credit cards, can be appealing because they require no money down. However, borrowers without a credit history and those who are struggling with bad credit may find it challenging to get approved for a no-deposit credit card. If applying for a secured credit card (i.e., one with a security deposit) is not ideal for your financial situation, you can ask to become an authorized user on someone else’s card or apply for a student or subprime credit card.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Do all credit cards require a deposit?

Only secured credit cards require a security deposit. Those with no credit history or bad credit scores might only be eligible for secured credit cards. If you have a good credit score, you can apply for a credit card without a deposit.

Can I get a credit card if I have no credit history?

It is possible to get a credit card with no credit history. A secured credit card requires a security deposit but makes it easier for borrowers with no credit history to get approved. Students can also consider student credit cards, which are often issued to student borrowers without any credit history.

What credit score is required for approval?

While having a good to excellent credit score (typically 670+) is ideal for getting the best credit cards with the lowest rates, some credit card issuers do offer cards for borrowers with fair or even poor credit (meaning scores between 580 and 669). These cards might have higher fees and fewer perks and may require a security deposit.

Photo credit: iStock/Prostock-Studio

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A credit card limit is the maximum you can spend before a repayment is required. For those who pay their balance on time to avoid interest and fees, a high limit provides valuable spending power. However, for those who view it as permission to overspend, it can lead to financial trouble.

While you can request an increase, issuers often grant them automatically to cardholders who manage credit well. But is a higher spending limit always a good thing? It depends on your financial situation. Here’s how to know if your credit card spending limit is too high.

How Does My Credit Card Spending Limit Work?

Credit cards are a form of revolving debt, which means that there is an upper spending limit. However, the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.

A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, and debt-to-income ratio. However, every credit card company differs in which factors it considers and how much emphasis it places on each component. The current average credit card limit is around $30,000.

It’s important to keep in mind that a credit limit represents the maximum you can spend, not a recommendation for spending. In fact, a good rule of thumb is to spend no more than 30% of your available credit to maintain healthy credit. Many financial experts suggest aiming even lower — closer to 10%. “Generally, the further away a person is from hitting their credit limit, the healthier their credit score will be,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

Why Your Credit Card Issuer Increased Your Spending Limit

Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.

There are various reasons this might happen.

•   Your credit has improved, resulting in a higher credit score.

•   Your income has increased.

•   Your card offers a built-in pathway to a higher credit limit.

•   The card issuer wants to retain you as a customer by offering a higher credit limit.

Credit card issuers may also increase customer credit limits to encourage responsible borrowers to spend more on their credit cards. Generally, the more cardholders spend on their cards, the better it is for the issuer’s bottom line.

Pros of a High Credit Card Spending Limit

Having a high spending limit on your credit card comes with a number of benefits:

•   Emergency safety net. A higher limit provides a larger financial cushion for unexpected expenses, such as urgent home repairs, medical bills, or car maintenance, without needing to apply for a new loan.

•   Lower credit utilization. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better (below 30% or closer to 10% is generally best).

•   Better rewards. If you have a rewards credit card, having a higher spending limit enables you to put more of your monthly expenses on a single card, helping you accumulate cash back, points, or miles faster.

Cons of a High Credit Card Spending Limit

As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit. Here are some to consider:

•   Risk of overspending. The most significant drawback is the temptation to spend more than you can comfortably afford just because the credit is available.

•   Potential for high-interest debt: If overspending leads to a high balance, the high limit can result in substantial debt and steep interest charges.

•   Future borrowing risks: Some lenders may view a very high total credit limit as a risk when you apply for a loan (such as a mortgage), as it represents a large amount of potential debt you could incur at any time.

What Happens if You Go Over Your Spending Limit

Unless you’ve opted into over-limit coverage, you generally can’t go over your spending limit on a credit card. Any transaction that pushes you beyond your credit limit will simply be denied.

If you have opted into over-limit coverage, however, the issuer will allow you to spend beyond your limit but will typically charge you a fee. These fees generally run between $25 and $35 but, by law, can’t exceed the amount of the overage. So if you went over your credit limit by $18, the issuer can’t charge you more than $18.

Before you opt in to an agreement like this, the credit card issuer must tell you what the potential fees will be. They must also provide you with confirmation that you opted in.

If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.

Recommended: Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Taking Control of Credit Card Debt

A higher spending limit can be a good thing if it’s used responsibly. If it leads to over spending, on the other hand, you may find yourself carrying a high balance from month to month and racking up interest. If that happens, here are some strategies that can get you back on track:

•   Pay more than the minimum: Look for ways to temporarily reduce or eliminate unnecessary expenses (like dining out or subscriptions) and put any savings you uncover towards paying down your balance.

•   Look for a balance transfer card: If you can qualify for a 0% interest balance transfer credit card, you can avoid paying interest on your balance for a period of time (typically for 12 to 21 months), making it easier to pay off. Just watch for transfer fees, which often run from 3% to 5%.

•   Consider a credit card consolidation loan: Taking out a fixed-rate personal loan with a lower interest rate than the card(s) you’re paying to pay off can help you save on interest and potentially pay off your debt faster. If you have multiple debts, a consolidation loan can also simplify repayment by rolling multiple monthly bills into one.

The Takeaway

A high credit card spending limit can be a beneficial tool, offering a financial safety net and helping to keep your credit utilization low, which can positively impact your credit. However, it only serves as an asset if you use it responsibly and avoid the temptation to overspend. If a high limit encourages you to take on excessive, high-interest debt, it may be too high for your current financial situation.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What’s the average credit card limit?

The current average credit card limit is around $30,000. However, credit limits can vary significantly based on factors like your credit score, income, and credit history. It’s important to remember that your credit limit is the maximum you can spend, not a suggested spending goal. Financial experts typically recommend keeping your spending, and thus your credit utilization rate, below 30% of your limit — and ideally closer to 10% — to maintain healthy credit.

Can a spending limit be too high?

Yes, a spending limit can definitely be too high for certain individuals. While a high limit is beneficial for maintaining a low credit utilization rate and offers an emergency cushion, it can also tempt people to overspend. If a high limit encourages you to carry a large, revolving balance and incur high interest charges that you struggle to pay off, then it is likely too high for your current financial habits and situation.

Is it bad to use 50% of your credit limit?

Using 50% of your credit limit is generally considered too high and can negatively impact your credit. This high usage translates to a 50% credit utilization rate, which is well above the recommended maximum of 30%, and far from the ideal 10%. A high credit utilization rate signals to lenders that you may be over-reliant on credit, financially overextended, and a higher risk of default.

Photo credit: iStock/mixetto

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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There are several explanations for why your credit score might fluctuate by a few points now and then. But if you’ve noticed that your score is down by as many as 20 points, and you can’t think of any reason for this dramatic drop, it’s a good idea to do some checking ASAP. This can help you determine what affected your score and what you should do about it.

Read on for some common reasons why your credit score could unexpectedly drop by 20 points, and how you can improve and protect your score going forward.

Why Did Your Credit Score Drop 20 Points?

The fact that you even noticed that your credit score took a dip is proof that you’re paying attention to your finances, so give yourself a high five for that. If there’s a problem — a credit reporting error, for example, or possibly identity theft — you’ve got a head start on getting it fixed. And if it’s something you did without knowing it could impact your score (at least not by this much) you can resolve to do better in the future.

Even if you’re doing everything right — including paying bills on time, keeping low credit card balances, and using credit score monitoring to track how you’re doing — you can’t always know from month to month what will happen to your credit score. That’s because credit scoring systems like FICO® Score and VantageScore® use information from a credit report to assess your creditworthiness and assign it a number from 300 (the lowest score) to 850 (the highest).

If the information in your credit reports is up to date and correct, your credit score will reflect that. But it’s up to each individual lender to decide when or even if it will report information to the three major credit reporting agencies: Equifax, Experian, and Transunion. And sometimes the reports can be incomplete or incorrect. If that’s happened to you, your score may drop, or it may not be as high as you think it should be.

What Factors Impact a Credit Score?

FICO® and VantageScore® use different formulas to calculate credit scores, but the same basic factors from your credit report can move your score up or down. And some things can have a bigger influence on your score than others.

Here’s how FICO® breaks down what affects your credit score:

•   Payment history (35%): Your record of paying your bills late or on time can have the biggest impact on your FICO® Score. A spending app can help you keep tabs on upcoming bills. 

•   Amounts owed (30%):  Even if you’re managing it well, carrying a lot of debt could affect your score. This category applies to the amount you owe overall, but it puts a priority on your credit utilization. Lenders generally like to see a credit utilization rate of 30% or lower.

•   Length of credit history (15%): This category looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts together.

•   Credit mix (10%): Lenders also may want to see that you, as a borrower, can handle different types of financing, including credit cards, installment loans, retail accounts, and mortgage loans. So FICO® includes this in its credit scoring formula.

•   New credit (10%): When you apply for some type of financing, whether it’s a new credit card or a new car, the lender may make what’s known as a hard credit inquiry, which could cause a dip in your score. The drop is typically small and temporary, but you might notice a bigger change if you make several credit applications at around the same time.

Should You Be Worried About Your Credit Score Dropping?

It’s normal to feel frustrated and concerned if your credit score drops suddenly, especially if you don’t understand what happened. But the good news is, it can be pretty easy to find out what’s up. If your financial institution, credit card company, or your favorite money tracker app offers you a way to get your credit score regularly, you may have access to a brief summary that explains what caused that number to go up or down. This can be a good place to start looking for clues as to why your score dropped by 20 points.

It’s also useful to know how to read a credit report so you can get the information you need to catch errors or spot identity theft. This can help you get to the bottom of what’s affecting your score and take steps to get that number back in line with what you think it should be. You have the right to request a free copy of your credit report from each of the credit bureaus once a year by visiting AnnualCreditReport.com.

Reasons Your Credit Score Might Go Down

It could be that something you did (or didn’t do) caused your score to drop, and you might not even know it. Maybe you closed an old account that you didn’t use anymore, or maybe you applied for a loan or new credit card. It’s also possible that you have an old unpaid balance hanging out there that you thought was cleared up but isn’t.

Examples of Credit Score Dropping

A combination of several factors could explain why your credit score seems to have suddenly and randomly dropped by 20 points. Here are some examples of why a credit score can go down:

You’re Using a Large Percentage of Your Available Credit

Are you close to maxing out all the credit you have available to you? Did you recently make a large purchase with your credit card that pushed you close to your credit limit? Even if you’re paying your bills on time, if your credit utilization rate is higher than 30%, it could explain a reduction in your credit score.

You Closed an Old Credit Card Account

It may seem counterintuitive (and super frustrating) that canceling a credit card  can have a negative effect on your credit. But there are a couple of reasons why closing a credit card account can lower your credit score. 

First, when you cancel a card, you reduce your available credit, which can cause a jump in your credit utilization rate. Second, closing an older account can affect the length of your credit history, which is another factor that goes into determining your credit score. It may make sense to close the account anyway if the card has high fees or if it’s hard to resist overspending. But if you do cancel a card, especially one you’ve had for a while, you can expect to see a temporary drop in your credit score.

You Made a Late Payment

Maybe you simply forgot to pay a credit card bill. Or maybe you failed to make a payment in a month when money was tight and figured you’d play catch-up with a bigger payment the next time. Either way, if the credit card company reported your late payment to a credit reporting agency, it could be the reason your credit score dropped. Remember: Payment history is the biggest factor in calculating your credit score.

You Made the Final Payment on an Installment Loan

When it comes to determining your credit score, your “credit mix” isn’t as big of a factor as your payment history or the amount of available credit you have. But if you recently paid off a car loan, personal loan, or some other type of installment loan — and your credit mix is now limited to just credit card debt — it could have an affect on your score. 

That doesn’t mean you shouldn’t celebrate your accomplishment or that you should run out and apply for another loan. But it could help explain why your credit score is lower than you think it should be.

What Can You Do If Your Credit Score Dropped by 20 Points?

There are a few steps you may want to consider taking right away if you notice a big drop in your credit score.

Review Your Credit Reports

If you find an error on your credit report, such as a payment incorrectly reported as late, the Consumer Financial Protection Bureau (CFPB) recommends filing a formal dispute, in writing, with both the credit reporting company and the entity that provided the information (such as a credit card company). By law, the credit reporting company must investigate your dispute and notify you of its findings.

If you notice signs that you may be the victim of identity theft (such as unknown accounts or unfamiliar debt), you may choose to alert the credit bureaus. You can also report identity theft on the Federal Trade Commission’s site, IdentityTheft.gov.

Prioritize Timely Payments

The biggest factor in determining your credit score is your payment history, so keeping track of your bills is important. If payment deadlines tend to get away from you, you may want to set up online bill pay to reduce your bill-paying burden. Or you can put payment due dates on a physical or digital calendar, then set up alerts on your phone so you know it’s time to pay. 

When you pay a bill, be sure to note the details, such as the date, amount, and confirmation number if paid online.

If You Can, Delay Applying for New Credit

You may want to wait until your credit score comes back up a bit before applying for a new credit card or loan. If you want to get the best interest rate or you’re worried about getting approved, you’ll want your credit to be shipshape. It also can be a good idea to avoid authorizing several companies to do a hard credit pull if you’re shopping for a mortgage, car loan, or credit card.

How Can You Build or Repair Your Credit?

If you’ve been working to improve your creditworthiness, even a small dip in your credit score can be disappointing. But you don’t have to let a negative fluctuation deter you from your goal.

How can you continue to build your credit? Besides paying your bills on time, managing your credit utilization, and having a good credit mix, you also can help lenders see that you’re a good risk by paying down high-interest debt — and keeping it paid off.

How Can You Monitor Your Credit Score?

There are several ways you can check your credit score without paying. Many credit card companies and financial institutions offer free credit reporting and scoring as a benefit to cardholders. (You may have to opt-in to begin receiving this service). If your personal information was compromised in a data breach, you may be offered free credit monitoring for a specific period of time. You also can pay for a credit monitoring service to get regular updates.

Allow Some Time Before Checking Your Credit Score?

Though credit score updates can occur at any time, checking about once a month should provide a good gauge of how you’re doing. (You can check your own credit score any time you like without any negative impact.) 

If you get a free credit score from your bank or credit card, you’ll probably receive a new score monthly. With a credit monitoring service, on the other hand, you may receive an alert any time there’s a significant change in your score or some type of suspicious activity.

Pros and Cons of Tracking Your Credit Score

Tracking your credit score can help you protect your credit and may provide added incentive to keep working on your financial health. Here are some pros and cons to consider:

Recommended: Why Did My Credit Score Drop After Dispute?

The Takeaway

A 20-point drop in your credit score can be worrisome. But there are several steps you can take to determine what caused such a significant change and then try to fix it.

It also can be helpful to be proactive instead of reactive when it comes to your credit score. By paying attention to the factors that can have the biggest impact on your credit, such as your payment history and credit utilization, you can keep working to build and protect your credit.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why did my credit score drop 20 points randomly?

It may seem as though your credit score dropped randomly, but there’s usually something behind a dip of 20 points or more — and it’s worth looking into. It could be a late payment, an error on your credit report, a sign of identity theft, or some other reason.

Why did my credit score drop and I don’t know why?

A change in your credit score reflects a change in a credit report. It may be that you made a late payment and you didn’t think your credit card company would report it. Or maybe you made a major purchase that changed your credit utilization rate. If you’re concerned, you may want to check your records against your most recent credit reports.

Is it normal for a credit score to drop 25 points?

A credit score can drop for many reasons. Though a 25-point dip is something you’ll probably want to check into (if you can’t figure out why it happened), there are steps you can take to dispute information in your credit report and repair your credit score.

Photo credit: iStock/milan2099

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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One of the most important chores on any financial to-do list is to regularly review your credit reports for errors and possible identity theft. If an error does appear, disputing it is a fairly simple process with a potentially big payoff: It might help build your credit score.

Keep reading to learn how to dispute a credit report and win.

How to Get an Accurate Credit Report

Consumers can access their credit reports for free every 12 months from the three major credit bureaus: Experian, TransUnion, and Equifax. These credit reporting companies feature similar but not identical data, and any errors may appear on one or more reports.

There are three ways to request a report:

•  Online: Visit AnnualCreditReport.com

•  By phone: Call 877-322-8228.

•  By mail: Download an Annual Credit Report Request Form from the URL above and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

You can request all three reports at once or each one at a different time without paying a fee. Helpful hint: By ordering one at a time and spacing out requests every four months, you can be fairly confident about catching major issues while they’re fresh and easier to dispute. For example, you might order the Experian report in February, the TransUnion one in June, and the Equifax one in October — all for free.

After you’ve used your free annual access in each case, you can pay to check your credit reports as often as you like. Credit reporting companies can’t legally charge a consumer more than $16.00 for a report. It’s also possible to access credit reports through specialty consumer reporting companies, some of which charge a fee.

Why It’s Important to Correct Mistakes in Your Credit Report

Credit reports generally make it easy to spot unexpected negative financial information, such as missed payments. However, take care to review your credit report for other incorrect data, however minor, such as errors in former addresses or employers. Common credit report errors include inaccurate account balances, duplicate account info, and false late payments.

In case of an error, take steps to have the mistake removed as soon as possible. Credit report errors can lead to a bad credit score, impact loan applications, or raise the interest rates you’re offered. Bad marks on a credit report can also affect your employment options, insurance premiums, and ability to rent an apartment.

Recommended: 6 Money Habits to Develop Financial Success

How to Dispute Errors on Your Credit Report

To dispute an error on a credit report, you’ll need to contact each credit bureau that published the error. Mistakes can appear on only one report or on all three. Each credit bureau has its own dispute process, so check the instructions on AnnualCreditReport.com or the individual credit bureau sites. You’ll likely need to fill out a dispute form and provide supporting documentation that helps prove there was an error.

If your dispute is accepted, follow up to make sure the credit bureau and the business that supplied the incorrect information update their records accordingly. If a mistake is easy to prove, start with the business that made the error. Be aware that credit bureaus and businesses cannot charge you to correct errors on your report.

If a mistake on a credit report is due to identity theft, it’s important to report this to IdentityTheft.gov and get a personalized recovery plan.

Recommended: Guide to Building Credit With No Credit History

Writing a Letter to Dispute a Mistake on Your Credit Report

Usually, a dispute needs to be submitted in writing. If you submit a letter via the Post Office, send it via Certified Mail and request a Return Receipt. That way, you have proof that the credit bureau received the letter.

The following information should generally be included in a dispute letter.

Identifying Information

The date, your name, your Social Security number, and your address all need to be included in the letter.

Each Item That Needs Disputing

Whether there is one error or many, you should outline each one briefly and clearly. Identify the error, explain why the information is wrong, and supply the correct information if applicable. Then, request to have the error corrected or removed.

Copy of the Credit Report

It can be helpful to enclose a copy of the credit report with the errors circled. Don’t send any original documentation with your letter. Make copies and keep the originals safe in case they’re needed again.

Why Consider Credit Score Monitoring?

To efficiently keep an eye on your credit reports, you may choose to use a credit monitoring service. These services will update you when certain credit updates appear, such as new accounts, hard inquiries, high credit card balances, or missed payments.

Not only does credit monitoring make it easier to stay on top of your credit and work toward building your credit score, but it can also help catch fraud and identity theft early.

How to Report Credit Scams

If you suspect you’ve been the victim of a credit scam, you should first call the companies involved to secure your accounts. Then, place a fraud alert with one of the three credit bureaus, and report the incident to IdentityTheft.gov, a division of the Federal Trade Commission. They’ll provide a personalized recovery plan, walk you through the steps, track your progress, and even pre-fill forms and letters for you. Then, you should dispute any false information that appears on your credit report.

The Takeaway

Disputing and correcting errors on your credit report is usually straightforward, as long as you can prove the mistake. Whenever possible, reach out directly to the business that reported the false information. Then, follow the dispute instructions for each of the three major credit bureaus: Experian, TransUnion, and Equifax. Review your credit reports annually to catch errors before they negatively affect your financial record and your life.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Who tends to win a credit dispute?

No one party or side always wins a credit dispute. If you can provide evidence that an error was made, you will likely win the dispute.

What reason should I put for disputing a credit report?

The reason for your dispute could be a typo, outdated information (more than seven years old), data that belongs to another consumer, or fraud, among other things. Include any supporting documentation you have to help strengthen your argument.

Does disputing a collection notice reset the clock?

No, but a dispute does pause the clock with regard to bill collectors. Once you dispute a debt in collections, the collections agency can’t contact you again until they’ve provided you with verification of the debt in writing.

Can a dispute lower my credit score?

Disputing an error will not lower your credit score. In fact, if the error is removed, your credit score could end up increasing. However, if the debt you dispute turns out to be valid, it will continue to affect your credit score.

What are the dangers of identity theft?

If someone steals your identity, your credit score could decrease, and you could be charged for purchases you didn’t make. Identity thieves could also take your tax refunds or exploit your medical insurance.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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