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It may be tempting to just make only the minimum payment on your credit card bill and put off paying the total amount until another time. However, only making your credit card minimum payment can cost you both in interest and your credit score. Plus, it can keep you in debt longer.

To avoid this predicament, here’s what you need to know about minimum credit card payments, as well as what you can do if making the minimum payment on your credit card is a challenge.

What Is a Credit Card Minimum Payment?

A credit card minimum payment is the lowest sum that you’re required to pay each credit card billing cycle. To avoid late fees or penalties, you must pay at least this amount.

If you don’t make the minimum payment amount, you could be charged a fee or, worse, your interest rate could increase, which is why it’s critical to understand this part of how credit cards work.

Creditors determine your minimum payment by using one of three different methods, which include:

•   A flat percentage of your total outstanding balance: Your minimum payment might be 1% to 3% of your balance. Thus, your minimum credit card payment will fluctuate monthly depending on your credit card balance at the time.

•   A percentage of your balance plus fees or interest that’s applied during that billing cycle: With this method, the credit card company may make your minimum payment equal to 1% of your revolving balance and then add any fees or the annual percentage rate (APR) charged within that billing cycle.

•   A flat rate: A creditor may apply a flat rate, perhaps $25 or $35, for your minimum payment.

Keep in mind that if your revolving balance is less than the minimum payment, your creditor will typically require you to pay the total amount. Because minimum credit card payment guidelines differ from creditor to creditor, you’ll want to get familiar with your credit card payment rules — ideally before you even apply for a credit card.

How Does a Minimum Payment Affect Your Credit Score?

Not only does paying the minimum payment on your credit card increase the amount you pay in interest, but it can also impact your credit score.

One of the factors that credit bureaus use to determine your credit score is your credit utilization ratio, which is the percentage of credit you’re using versus the amount you have available. A good rule of thumb is to keep your credit utilization ratio below 30% (better still, closer to 10%) so your credit won’t be affected.

For example, let’s suppose you have $15,000 of available credit. If your revolving credit card balance is $7,500 racked up from places that accept credit card payments. That means your credit utilization ratio is 50%, which exceeds the 30% threshold. If you’re only making the minimum credit card payments, your credit utilization ratio will stay beyond an acceptable rate for a more extended amount of time. Therefore, your credit score may dip.

To avoid this scenario, it’s wise to make more than the monthly minimum payment so you keep your credit utilization low. This is especially important if you have a limit that’s below the average credit card limit, as it will be easier for your credit utilization ratio to jump.

What to Do If You Cannot Afford Your Minimum Payment

Although you want to make more than your minimum credit card payment each month, you may find yourself in a situation where you can’t afford to do so. Fortunately, there are steps you can take to ease this financial burden.

Stop Using Your Credit Card

If you’re trying to repay your credit card debt, it’s best not to add to it. This means that while you’re working to pay down your credit card balance, you should consider putting your credit card use on pause. If you continue to use your credit cards, you may feel like you’re never getting ahead. This can become a vicious debt cycle that can be challenging to break.

You can pause your use by putting your credit cards in a safe place where you don’t have access to them but also don’t risk them getting stolen. For example, you could put them in your family’s safe. This way, you can avoid the temptation of impulse buys.

Also, you may find it helpful to track your spending. This will allow you to see where your money is going and get a better handle on what costs might be busting your budget.

Reduce the Cost of Your Bills

Looking for ways to cut your expenses can free up extra cash to help you make your credit card minimum payments. You might start by saving on streaming services you’re not using, or consider putting a gym membership on hold until your credit card balance is repaid.

For example, if you have cable, Netflix, Amazon Prime, and Hulu, you may want to choose just one or two of these services to keep. Then, you can cancel the other subscriptions that you don’t need, saving you money and making it easier to meet your minimum payment on your credit card.

Consider Getting a Side Job to Earn Extra Income

Increasing the amount of money you have coming in also can help you accelerate your credit card debt repayment. Even bringing home an extra couple hundred dollars per month via a low-cost side hustle could help you make a significant dent in your credit card debt.

For example, if you’re handy, you could sign up for a service like TaskRabbit to help people tackle projects around their homes. Or, if you like to interact with a variety of people, you could consider driving for a ride-share service like Uber or Lyft.

Also, if you receive a financial windfall (say, extra money from a work bonus, tax refund, or a gift), you could put these funds to good use by making a larger credit card payment.

Call The Credit Card Company

In some cases, you may want to contact your credit card company if you cannot make the credit card minimum payment. You’ll want to explain why you can’t make the minimum payment and how much you can afford to pay.

Also, share with your credit card company when you can begin making regular payments again. Your credit card company would rather receive payment than no payment. So, by communicating with them, they might be willing to work with you while you repay your debt.

Explore Get-Out-Of-Debt Options

There are other options to help you get out of your credit card debt. For starters, debt consolidation is a get-out-of-debt strategy that can help you minimize your interest payments, helping you to repay your debt faster. With debt consolidation, you take out a loan with a fixed interest rate that you use to repay all of your other high-interest debts. Ideally, you want to find a financing option that can yield a lower interest rate.

How Paying Only the Credit Card Minimum Payment Costs You More

As you now know, it’s essential to make at least the credit card minimum payment. But making only the minimum payments each month can end up costing you more — even if you have a good APR for a credit card. When you carry a monthly credit card balance, the interest continues to accrue, which can keep you in a debt cycle.

To illustrate the cost of paying the minimum payment on the credit card only, let’s suppose your credit card has a 17% interest rate and you have a $3,000 revolving balance. If your credit card company has a $50 minimum payment requirement, it will take you 135 months to repay your debt. Additionally, you’ll end up paying roughly $3,743 in interest alone. This means you’ll spend a total of close to $7,000 to pay off a $3,000 bill.

Luckily, you don’t have to do all of this math yourself if you’re wondering how your credit card payments will impact the total amount you owe. Per the Credit CARD Act of 2009, credit card companies are required to put a minimum balance warning on each bill you receive to protect your interests.

Usually, credit card companies will communicate this warning with a table that provides a snapshot of the amount of time it will take to repay your balance if you only make the minimum payment. In some cases, the company may also provide a table that suggests the amount of time it will take to repay your debt if you make more than the minimum payment.

The Takeaway

If you want to avoid costly interest or a dip in your credit score, it’s wise to make more than your credit card minimum payment each month. An even better solution (if you can afford to do so) is to pay off your total credit card balance every month. This way, you can dodge high interest payments and keep your credit utilization ratio at a favorable rate.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What are your minimum payment rights?

As part of the Credit Card Accountability Responsibility and Disclosure (CARD) Act, creditors are legally required to illustrate how long it will take you to repay your debt if you make only the minimum payment. Also, they must provide a toll-free number that cardholders can call to get assistance with credit counseling or debt management. These requirements are designed to keep credit practices fair.

Does paying minimum due affect your credit score?

Yes, making a minimum payment can affect your credit score since it impacts your credit utilization ratio, a factor used to calculate your credit score. Credit utilization ratio is the percentage of credit you’ve used versus the amount you have available. So, if you continue to carry a high balance on your credit card, your credit utilization rate may be higher than recommended, which can impact your credit score.

What happens if I don’t pay my credit card for 5 years?

After just six months if you don’t pay your credit card, the credit card company is required to charge-off the account. This means they will close your account and write it off as a loss. However, you will still be responsible for repaying the outstanding balance either to your creditor or a third-party collections company.

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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.

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

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An irrevocable letter of credit (or ILOC) is a written agreement between a buyer (often an importer) and a bank. As part of the agreement, the bank agrees to pay the seller (typically an exporter) as soon as certain conditions of the transaction are met. These letters help reduce a seller’s concern that an unknown buyer won’t pay for the goods they receive. It also helps eliminate a buyer’s concern that an unknown seller won’t send the goods the buyer has paid for.

Irrevocable letters of credit are often found in international trade, though they can be used in other types of financial arrangements to ensure that a seller will be paid, even if the buyer fails to uphold their end of the bargain.

What Is an Irrevocable Letter of Credit?

Simply defined, an irrevocable letter of credit represents an agreement between a bank and a buyer involved in a financial transaction. The bank guarantees payment will be made to the seller according to the terms of the agreement. Since the letter is irrevocable, that means it cannot be changed without the consent and agreement of all parties involved.

Irrevocable letters of credit can also be referred to as standby letters of credit. Once an irrevocable letter of credit is issued, all parties are contractually bound by it. This means that even if the buyer in a transaction doesn’t pay, the bank is obligated to make payment to the seller to satisfy the agreement.

Having an irrevocable letter of credit in place is a form of risk management. The seller is guaranteed payment from the bank, which can help to reduce concerns about the buyer failing to pay. And it ensures that the seller will follow through on their obligations by providing whatever is being purchased through the agreement. In simpler terms, a standby letter of credit or irrevocable letter of credit is a sign of good faith on the part of everyone involved in a transaction.


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How Does an Irrevocable Letter of Credit Work?

An irrevocable letter of credit establishes a contractual agreement between a buyer, a seller, and their respective banks. It effectively creates a safeguard for both the buyer and the seller, in that:

•   Buyers are not required to forward payment until the seller provides the goods or services that have been purchased.

•   Sellers can collect payment for goods and services, as long as the conditions outlined in the letter of credit are met.

The bank issuing the letter of credit acts as a go-between for both sides, guaranteeing payment to the seller even if the buyer doesn’t pay. Assuming the buyer does fulfill their obligations, they would then make payment back to the bank. In a sense, this allows the buyer to borrow from the bank without formally establishing credit in the form of a loan or credit line. (Check with your financial institution to learn what fees may be involved.)

Before an irrevocable letter of credit is issued, the bank will first verify the buyer’s creditworthiness. Assuming the bank is reassured that the buyer will, in fact, repay what’s owed to complete the purchase, it will then establish the irrevocable letter of credit to facilitate the transaction between the buyer and seller. Irrevocable letters of credit are communicated and sent through the SWIFT banking system.

Recommended: How Do Banks Make Money?

Irrevocable Letter of Credit Specifications

The exact details included in an irrevocable letter of credit can depend on the situation in which it’s being used. The conditions that are set for the completion of the transaction will also matter. But generally, you can expect an irrevocable letter of credit to include:

•   Buyer’s name and banking information (that is, their bank account number and other details)

•   Seller’s name and banking information

•   Name of the intermediary bank issuing the letter of credit

•   Amount of credit that’s being issued

•   Date that the letter of credit is issued and the date it will expire

An irrevocable letter of credit will also detail the conditions that must be met by both the buyer and seller in order for the contract to be valid. For example, the seller may need to provide written verification that the goods or services referenced in the agreement have been provided before payment can be issued. The letter of credit must be signed by an authorized bank representative. It may need to be printed on bank letterhead to be valid.

Do I Need an Irrevocable Letter of Credit?

You may need an irrevocable letter of credit if you’re doing business with someone in a foreign country. You may also require one if you are conducting a transaction with a new company or individual (one with which you don’t yet have an established relationship).

Irrevocable letters of credit can help to mitigate some of the risk that goes along with international transactions. These letters ensure that if you’re the seller, you get paid for any products or services you’re providing. They also protect you if you’re the buyer, promising that products or services are delivered to you.

An irrevocable letter of credit could also come in handy if you’re still working on building credit for your business and you’re the buyer in a transaction. The bank will pay the money to the seller; you’ll then repay the bank. Payment may be required in a lump sum from your business bank account or another source. Or the bank may also offer the option of repaying it in installments over time. Repaying your obligation could help to raise your business’s creditworthiness in the bank’s eyes. This may make it easier to take out other loans or lines of credit later.


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Alternatives to Irrevocable Letters of Credit

An irrevocable letter of credit is not the only way to do business when engaging in international transactions. You may also consider trade credit insurance or another type of letter of credit instead.

Trade Credit Insurance

Trade credit insurance, also referred to as accounts receivable insurance or AR insurance, is used to insure businesses against financial losses resulting from unpaid debts. You can use trade credit insurance to cover all transactions or limit them to ones where you believe there may be a heightened risk of loss, such as transactions involving foreign businesses.

A trade credit insurance policy protects your business in the event that the other party to a financial agreement defaults. It can insulate your accounts receivable against losses if an unpaid account turns into a bad debt. Purchasing trade credit insurance may be an easier way to manage risk for your business overall, as it’s less involved than an irrevocable letter of credit.

Recommended: Business Loan vs Personal Loan: Which is Right for You?

Letters of Credit

A letter of credit guarantees payment from the buyer’s bank to the seller’s bank in a financial transaction. Like an irrevocable letter of credit, it establishes certain conditions that must be met in order for the transaction to be completed. But unlike an irrevocable letter of credit, a standard letter of credit can be revoked or modified.

You might opt for this kind of letter of credit if you’re doing business with someone you don’t know and you want reassurance that the transaction will be completed smoothly. A regular letter of credit may also be preferable if you’d like the option to modify or cancel the agreement.

The Takeaway

An irrevocable letter of credit is something you may need to use from time to time if you run a business and regularly deal with international transactions. It adds a layer of protection to buying and selling, as a bank is saying it will cover the transaction. An ILOC, as it’s sometimes known, can provide reassurance when working with a new business or establishing your company overseas. The letter cannot be changed, so you’re getting solid peace of mind.

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FAQ

What is the difference between a letter of credit and an irrevocable letter of credit?

A letter of credit and irrevocable letter of credit are largely the same, in terms of what they’re designed to and in what situations they can be used. The main difference is that unless a letter of credit specifies that it is irrevocable, it can be changed or modified by the parties involved.

What is the cost of an irrevocable letter of credit?

You generally need to pay a transaction fee for an irrevocable letter of credit. The fee is typically a small percentage of the transaction amount. The rate will vary from bank to bank.

Does an irrevocable letter of credit expire?

Yes, an irrevocable letter of credit will typically state the date by which the seller must submit the necessary paperwork in order to receive payment.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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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.

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Credit scores measure your financial health at a given point in time. Ideally, your score increases as you build your credit history, so a sudden decline can leave you wondering why.

Several things can cause a credit score to fall 100 points (or more), and late payments are often at the top of the list. Here’s a closer look at why credit scores decrease. 

Why Did Your Credit Score Drop 100 Points?

A credit score can drop by 100 points or more when there’s a significant change to your credit reports. Possible reasons for a credit score drop of 100 points or more include:

•   Late payments

•   Missed payments

•   High balances relative to your credit limits

•   Reduced credit limits

•   Delinquencies and collection accounts

•   Bankruptcy filing

•   Foreclosure or repossession

•   Judgments

•   Multiple inquiries for new credit in a short timespan

•   New credit accounts in your name1

These types of items can drag your score down. Paying off loans or closing credit card accounts can also cost you credit score points, even though you might consider them positive financial steps. 

Identity theft and fraud can trigger a sizable drop in your credit score as well. If someone uses your identity to obtain loans or open lines of credit without your knowledge, that could leave you vulnerable to late or missed payments, delinquencies, and collection actions. A money tracker app can help you keep tabs on your credit score, and you’ll also get updates when it changes. 

Should You Be Worried About Your Credit Score Dropping?

A credit score drop can be worrisome, especially if you weren’t expecting it. You may have cause for concern if you:

•   Plan to apply for a mortgage or another type of loan soon

•   Would like to refinance an existing debt that you have at a lower interest rate

•   Suspect that someone may be using your identity to obtain credit fraudulently

Fluctuating credit scores could make it more difficult to get approved for new loans. If you are approved, a lower score could result in a higher interest rate. 

Identity theft is a more serious matter. You may not even be aware that someone is using your identity to obtain credit in your name until you’re denied credit, or worse, sued for an outstanding debt you didn’t create. 

Reasons Your Credit Score Went Down

Why did my credit score drop by 100 points for no reason? The short answer is that it didn’t. There must be some change to your credit report to result in a score decline. 

Changes that can show up on your credit reports include:

•   New accounts opened in your name

•   Account closures

•   Changes to your balances or credit limits

•   Payment activity, including late payments or missed payments

•   Delinquencies and accounts that are sent to collections

•   Paid off balances

•   Debt settlements, in which your creditors agree to let you pay off less than what you owe

•   New inquiries for credit1

Inaccurate information can also harm your credit. Between 2021 and 2023, consumer complaints about credit report errors increased by 168%, according to the Consumer Financial Protection Bureau (CFPB). Credit report errors can range from payments being incorrectly reported to accounts listed as belonging to you that are not yours.2 

In some cases, a credit score drop might be caused by someone else. This can happen when you cosign a loan for someone. As the cosigner, you’re legally responsible for the debt. Any activity relating to the account, including late or missed payments, can show up on your credit report.3 

What Can You Do If Your Credit Score Dropped by 100 Points?

If your credit score drops by 100 points or more, the first thing to do is determine why. Obtaining copies of your credit reports can shed some light on what may be causing the decline. 

Here are some things to look for as you review your reports:

•   Missing or incorrect payment history

•   Incorrect balance information

•   Accounts that don’t belong to you

•   Collections for debts that don’t belong to you

•   Loan accounts you’ve paid off that still show a balance

•   Open accounts that are listed as closed or vice versa

•   Duplicate debts, meaning the same account is listed multiple times

If you identify what you believe is an error or inaccuracy, you have the right to dispute it with the credit bureau that’s reporting the information. Equifax, Experian, and TransUnion — the three major credit bureaus — all allow you to initiate credit report disputes online.4 

Why did my credit score drop over 100 points when there were no errors? That’s trickier to answer, as it depends on the information in your credit file. If there are no errors or inaccuracies, then you’ll need to consider things like payment history, credit limits, and debt balances to see if they’ve had any impact on your score. 

Examples of Credit Score Dropping

Hopefully, you never have to deal with a major credit score drop. But it may help to have some examples of what can cause your score to go down. 

•   You’re ready to buy a home and are shopping for a mortgage lender. You find the one you want to work with and apply for a loan. You’re approved, but the new inquiry and associated debt on your credit reports lead to a score drop. 

•   You cosign a car loan for your niece, on the promise that she’ll make the payments on time. She loses her job but doesn’t tell you and the loan payments go unpaid for six months. The lender repossesses the vehicle, which lands on your credit report and costs you credit score points. 

•   You make the final payment to your student loans. The account is now listed as closed and paid in full on your credit reports, but it lowers your score. 

Again, not all things that lead to a credit score drop are negative. Paying off debt, for example, is something to celebrate even though it can ding your credit to a degree. 

How to Build Credit

How long does it take to build credit? There’s no simple answer, as it can depend on what you’re doing (or not doing) to recover lost credit score points. 

Some of the most effective strategies for building credit include:

•   Paying bills on time to establish a positive payment history

•   Keeping the balances on your credit cards low or paying in full each month

•   Paying down debt that you already have

•   Periodically requesting credit limit increases from your credit cards (but not running up new debt against them)

•   Leaving older credit accounts open, even if you don’t use them

•   Using different types of credit, such as loans and credit cards

•   Limiting how often you apply for new credit

You can also build credit as an authorized user on someone else’s credit card. Authorized users have charging privileges on the card and account activity will show up on their credit reports, but they’re not legally responsible for the debt.5

Having a checking or savings account typically doesn’t affect credit scores. Banks can, however, report negative activity related to closed accounts to ChexSystems, a consumer credit reporting agency. A negative ChexSystems report could make it difficult to get approved for a new bank account. 

Allow Some Time Before Checking Your Score

If you recently checked your credit following a score drop, you may want to wait a while before checking it again. Credit scores change when there’s new information added to your credit reports, whether it’s something positive or negative. 

It may be helpful to check your credit monthly or quarterly if you’re working on rebuilding your score. That way, you can track your progress against any steps you’re taking to improve your score to see what’s working. 

At a minimum, it’s a good idea to check your credit at least once annually. That can allow you to see what’s changed over the last year and look for any suspicious or potentially fraudulent activity. 

Pro tip: Use a free credit monitoring service to get regular credit score updates. 

Recommended: How to Check Your Credit Score Without Paying

Closing a Credit Card Account Can Hurt Your Score

Closing credit cards can hurt your score if you still owe a balance at the time you close the account. Your credit utilization ratio measures how much of your available credit you’re using. When you close a credit card with a balance due, you automatically increase your credit utilization ratio.6

For example, let’s say you have a combined credit limit of $20,000 across five credit cards. You owe $6,000 in total debt to your cards, which makes your credit utilization ratio 30% ($6,000 / $20,000 = 0.3).

Now, assume that you owe $5,000 to one card alone. That card has a credit limit of $10,000. You close it, cutting your total credit limit in half. Now you have a credit utilization ratio of 60% ($6,000 / $10,000 = 0.6).

Some experts say that 30% or less is an ideal credit utilization ratio to aim for, while others target 10% instead. The main thing to remember is that the lower your credit utilization is, the less harmful changes can be to your score. 

In terms of how to lower credit utilization, you can do so by paying down credit card balances and/or increasing your credit limits. 

What Factors Impact Credit Scores?

If you’re wondering what affects your credit score, it’s not just one thing. FICO credit scores, which are the most commonly used among top lenders, are determined by five factors. 

•   Payment history: 35% of your score

•   Credit utilization: 30% of your score

•   Credit age: 15% of your score

•   Credit mix: 10% of your score

•   Credit inquiries: 10% of your score7

VantageScores are based on some of the same factors, though they’re calculated differently. The VantageScore model was developed by the credit bureaus as an alternative to FICO scores. 

Pros and Cons of Tracking Your Credit Score

Tracking your credit score can be beneficial but there are some potential downsides. Here’s a quick look at the advantages and disadvantages. 

Recommended: Why Did My Credit Score Drop After a Dispute?

How to Monitor Your Credit Score

Credit score monitoring services make it easy to track your credit scores and get notifications when there’s a change to your credit report. SoFi, for instance, offers free weekly credit score updates and access to a certified financial planner if you have questions about credit score changes. 

Regardless of which service you use to monitor your credit, keep track of changes as they’re reported. Specifically, look at which changes are positive and which are negative. That can guide you toward what you might need to do to improve your score. 

The Takeaway

Seeing your credit score drop by 100 points or more can be disheartening, but it’s not the end of the world. There are things you can do to get your score back on track. 

Tracking your money is a good place to start. Tools like a spending app connect all of your accounts in a single dashboard so you can understand the factors that are influencing your credit scores. You can also check your scores for free. It’s a simple way to take charge of your financial health while you work on building good 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 100 points when nothing changed?

It may seem as if nothing has changed on your credit reports, but there must be some type of change for your score to be affected. If your score dropped, take time to review your credit reports thoroughly. Even a seemingly minor change, such as a new credit inquiry, could make a dent in your score. 

Why is my credit score going down if I pay everything on time?

Paying bills on time can help add points to your score, but it might still go down if you have a high credit utilization or apply for new credit frequently. Closing accounts could also hurt your score, even if you pay on time. Using a spending app to track bills and expenses can help you stay on top of your due dates.

How to dispute a credit score drop?

You can’t dispute a credit score drop, but you can dispute the information on your credit reports that you believed caused the drop. Keep in mind, however, that disputing credit report information isn’t guaranteed to improve your score. 

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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.

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.

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You may have heard of both FICO® and Experian, but the two companies serve different purposes.

FICO is a credit scoring model developed by the Fair Isaac Corporation (FICO) that lenders often use when assessing a borrower’s creditworthiness, or how likely they are to repay debts.

Experian, on the other hand, is one of the three major credit bureaus (along with Equifax and TransUnion) that collects credit and debt information and uses it to create individual credit reports. These credit reports offer more details about an individual’s credit history than FICO’s three-digit score.

Let’s take a closer look at what separates FICO vs. Experian, which credit score is the most accurate, and how to keep tabs on your credit score.

What Is the Difference Between Experian Score vs. FICO?

As we mentioned, Experian is a major credit reporting agency. It does not have its own credit scoring model. However, in 2006, it partnered with Equifax and TransUnion to create the VantageScore credit score model. Like FICO, VantageScore provides three-digit credit scores for consumers, though it uses slightly different factors and weightings.

The credit score Experian provides — sometimes called an “Experian score” — relies on both VantageScore and FICO Score.

FICO works differently. As a credit scoring model, it uses a proprietary algorithm to evaluate your credit risk. Specifically, the following factors affect your credit score:

•   Your payment history

•   The amounts you owe

•   The length of your credit history

•   How much new credit you have

•   The diversity of your credit mix

While FICO is used in the majority of lending decisions, some lenders use VantageScore.

Which Credit Report Is Most Accurate?

It’s common to have multiple credit reports, including ones with Experian, Equifax, and TransUnion. It’s also common to have minor differences in your credit file from bureau to bureau. That’s because lenders don’t always report the same information at the same time to every bureau. But rest assured, credit reports from all three credit bureaus are widely considered to be accurate.

That said, it’s a good idea to regularly review your credit report. You can access yours for free via AnnualCreditReport.com or through tools like a money tracker app.

If you find any errors or inconsistencies in your credit report, be sure to dispute them with the relevant credit bureau so the incorrect information can be removed.

Why Is My Experian Credit Score Different From FICO?

You may notice that your so-called Experian score is slightly different from your FICO Score. That’s because both scores are based on different scoring models. FICO uses its own algorithm, while Experian’s score uses both FICO and VantageScore.

While some variations are to be expected, if one score is drastically higher or lower than the other, it’s a good idea to review your credit reports and address inaccuracies.

Is Experian Better Than FICO?

No credit score is better than another. Some lenders prefer FICO, white others rely on VantageScore. Each model can provide lenders with different insights about a person’s financial habits.

The good news is that FICO and VantageScore generally calculate their scores with similar information, which means you can improve both scores simultaneously. Smart strategies include paying bills on time, keeping credit utilization low, and paying down balances.

Recommended: How Long Does It Take to Build Credit?

Is a FICO Score the Same as a Credit Score?

When comparing a FICO Score vs. a credit score, it’s important to understand that a FICO Score is a type of credit score. But of course, it’s not the only type of credit score.

VantageScore, for example, issues credit score models such as VantageScore 4.0 and VantageScore 4plus™. Experian, Equifax, and TransUnion also provide credit scores based on data in your credit report.

What Is My Real Credit Score?

There is no one true credit score. Instead, banks, lenders, and other companies may use different credit scores when they check your credit. And they could see different figures, depending on which credit score they use.

Fortunately it’s relatively straightforward to check your credit score without paying. That way, you can get an idea of what your credit score is and what lenders might see when they check your credit.

What Score Do Lenders Use?

Lenders can and do consider a variety of credit scores, depending on which scoring model works the best for their specific lending criteria. Unfortunately, it’s often difficult or even impossible to know which model a particular lender uses. However, the factors that impact your credit score generally hold true regardless of the credit score model used.

Understanding Various Credit Score Models

While most credit score models start with some of the same basic data, each one uses different information and weighs credit history information differently. This can mean that the different credit score models, such as FICO and VantageScore, come up with different credit scores, even for the same consumer.

Recommended: What Is the Starting Credit Score?

How Can You Check Your Credit Score?

Keep in mind that your credit score updates every 30 to 45 days, as new information comes rolling in from lenders. If you’re working on boosting your three-digit number, you may want to check on your progress every so often.

There are a few different ways that you can keep tabs on your credit score. You can sign up for a credit score monitoring service, which can provide regular credit score updates.

Another way is by using a spending app or credit card that provides access to your credit score as a feature or benefit. You may also have free access to it through your bank.

The Takeaway

FICO and Experian may be common names, but that’s where the similarities end. FICO is a widely used credit scoring model that creates a three-digit score based on reports provided by credit bureaus, including Experian. In addition to creating those detailed credit reports, Experian generates a credit score using data from FICO and another scoring model, VantageScore. Lenders may use both VantageScore and FICO when determining an individual’s creditworthiness.

Credit scoring models usually rely on a similar set of information, which means you can take the same actions to boost both scores. Making on-time payments, paying down what you owe, and diversifying your credit mix are all ways to help build up your credit score.

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

Is Experian or FICO more reliable?

Your VantageScore and your FICO Score are two different credit scores that use two different credit models. Both are considered to be reliable. But lenders may prefer to use one model over the other, depending on which one best fits their needs.

Why is my FICO Score different on Experian?

Though it does not have its own credit scoring model, Experian generates a score using data from VantageScore and FICO. FICO, on the other hand, creates its score using only its own calculations.

How close is your FICO Score to your credit score?

People have multiple credit scores. Your FICO Score is just one of them. Most credit scores use a similar set of data, which means credit scores usually vary by only a few points. If you spot a large discrepancy between your scores, take a look at your credit report and dispute any errors or inaccuracies you see.

Which credit score is most accurate?

No one credit score is considered more accurate than the others. Rather, different credit scores may provide lenders with different insights on spending or borrowing habits.

What is a good FICO Score?

FICO Scores are generally divided into five different categories, from Poor to Exceptional. A “good” FICO Score falls between 670 and 739. Having a FICO Score that is Very Good (740 to 799) or Exceptional (800 to 850) is even better.

Why is my FICO Score higher than my credit score?

Your FICO Score is just one of many credit scores that you may have. It may be higher or lower than other credit scores depending on the calculations used, including how the information in your credit report was weighed. As long as your various scores are within a few points of each other, there is usually no cause for alarm.

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Photo credit: iStock/Prostock-Studio

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.

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.

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Credit reports contain financial records of debts you owe and ones you’ve paid off. Positive information can remain on your credit reports indefinitely. Most negative information falls off your credit after seven years, though certain types of bankruptcy filings can remain longer.

Here’s a closer look at how financial records impact your credit reports.

How Long Do Inquiries Stay on a Credit Report?

When you apply for a loan, credit card, or line of credit the lender can perform what’s called a hard inquiry. This simply means that they pull copies of your credit reports, which they’ll use to make an approval decision.

Hard inquiries show up on a credit report and they’re included in your FICO® credit score calculations. Each new inquiry remains on your credit report for two years, according to FICO. However, they’re only considered in credit score calculations for the first 12 months.
Soft inquiries occur when you check your credit reports yourself or a company pulls your credit for the purposes of prequalifying or preapproving you for a loan. These inquiries won’t show up on a credit report, and they don’t have any impact on your credit score.

That distinction is important if you’re learning how to build credit.

Recommended: How Long Does It Take to Build Credit?

How Long Does Negative Information Remain on Your Credit Report?

Negative information on a credit report is any information that’s harmful to your credit score. What affects your credit score negatively? The list includes:

•   Late payments

•   Missed payments

•   Collection accounts

•   Charge-offs

•   Judgments

•   Foreclosures

•   Bankruptcies

Generally, negative information can stay on your credit report for up to seven years. Chapter 7 and Chapter 11 bankruptcy, however, can stick around on your credit report for 10 years.

In terms of how negative items impact your credit score, age matters, according to FICO. Newer negative items, such as collections or late payments, have a more immediate impact on your scores than negative items that are several years old. A money tracker app makes it easy to track your credit and your money in real time so you can get ahead financially.

How Long Does Positive Information Remain on Your Credit Report?

Positive information can remain on credit reports indefinitely. Credit bureaus are not required to remove this information, though they may do so at the seven-year mark. Examples of positive information that can stay on a credit report, regardless of time, include:

•   On-time payments

•   Open accounts that have a $0 balance or a low balance, relative to your credit limit

•   Closed accounts that you’ve paid in full

Positive items on a credit report are a good thing, since they help your credit scores. On-time payments and low balances on credit accounts have the biggest impact overall. Making biweekly payments or increasing your credit limits are two helpful ideas for how to lower credit utilization. Using a spending app to manage your budget and expenses can also help keep credit card balances low.

How to Remove Negative Information From Your Credit Report

Negative information that’s accurate cannot be removed from a credit report. For example, if you miss several payments on a loan but get caught up later, those late payments will stay on your credit reports until you hit the seven-year mark.

Inaccurate information, on the other hand, can be removed through the dispute process. Examples of inaccurate or incorrect items you could dispute on a credit report include:

•   On-time payments that were not properly attributed to your account

•   Credit accounts that don’t belong to you

•   Paid-in-full accounts that still show a balance on your credit reports

•   Account activity relating to fraudulent activity or identity theft

You’ll need to dispute the inaccurate information with the credit bureau that reports it. All three credit bureaus — Equifax, Experian, and TransUnion — allow you to initiate credit report disputes online. You’ll need to fill out a dispute form and provide some details about the dispute.

Once the credit bureau receives the dispute, it’s required to investigate your claim and return a decision to you promptly. If the credit bureau finds that there’s an error on your reports, it’s legally required to remove or update the information.

Your credit score updates monthly for the most part. Enrolling in credit score monitoring can make it easier to track changes, including changes to your score following a dispute.

Recommended: Why Did My Credit Score Drop After a Dispute?

Do You Still Have to Pay a Debt If It Fell Off Your Credit Report?

A debt can fall off your credit report if enough time passes. However, the amount owed doesn’t go away. Creditors and debt collectors could still attempt to get you to pay if the statute of limitations hasn’t passed.

The statute of limitations on debt allows creditors and debt collectors a set window of time in which to sue you for an unpaid balance. Each state determines how long the statute of limitations applies but in all states, its expiration doesn’t remove your legal obligation to pay what you owe.

Should you pay old debts? Ethically, yes. But if a debt falls off your credit report and the statute of limitations has expired, it would be very difficult for a creditor to force you to pay via a lawsuit.

The Takeaway

Reviewing your credit reports regularly is a good way to see what’s helping or hurting your score at any given time. If you have negative items on your credit report, you might see your score drop, but those points can come back with the passage of time.

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

What stays on a credit report forever?

Positive information can stay on a credit report forever, as credit bureaus are not required to remove any items that help your credit score. However, credit bureaus can choose to remove positive information after seven years.

Can credit information stay on my credit report for over 7 years?

Credit information can stay on your credit report for over seven years if it’s positive. Generally, negative information cannot stay on your report for more than seven years, unless you file for Chapter 7 or Chapter 11 bankruptcy. In that case, the bankruptcy filing could stay on your report for 10 years.

Do old accounts fall off a credit report?

Old accounts can fall off your credit report after seven years if they have negative information. Positive information from old accounts or newer ones can stay on your credit reports indefinitely.

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Photo credit: iStock/PeopleImages
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.

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.

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