Credit Scores: What Matters, What Doesn’t

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Posted February 4, 2013 by Kelley Long in Life After Five
Credit score

 

According to Visa, almost sixty percent of people don’t know what determines a credit score. It’s no surprise, with media outlets and silly television commercials assailing us with mixed messages about what counts and what doesn’t. Here, five things that you might think matter – but don’t – and five that really do.

What Doesn’t Matter

  • Employment history. Even though the amount of credit card offers I receive skyrocketed when I re-entered the workforce after being self-employed for three years, credit agencies do not track your employment, nor does it affect your credit score. Whether or not you have a job may affect your ability to obtain credit (such as a loan or credit card), but that information does not go into your credit history.
  • Interest rates on debt. The lower your rates, the quicker you’ll pay off debt, which matters. But having higher rates does not ding your score.
  • Assets/savings. Your credit score is based solely on your credit history. Your bank account balance is not a part of your credit history. Rich people can have bad credit too.
  • Age. Your date of birth might be on your credit report, but it does not play into the calculation of your credit score.
  • Where you live. Sorry, but that swank ZIP code won’t do diddly for your credit score if you’re not paying your bills on time!

What Does Matter

  • Paying on time. Whenever anyone asks me how to increase their credit score, my automatic response is, “Pay all your bills on time. Every time.” One late payment can wreak havoc on your score. You’d be surprised how many wealthy people struggle with this one!
  • Amounts you owe. The balance of your accounts relative to your credit limits definitely makes a difference on your credit report. The closer you are to maxing out, the worse the effect.
  • How long you’ve had credit. It’s called a credit history for a reason. The whole purpose is to help a creditor decide if they should lend you money. The further back you can demonstrate that you regularly pay your debts back, the better your score will be. This is where the advice about keeping a zero balance card open comes into play – just to show how long you’ve had it.
  • New accounts and credit checks. Opening a slew of new accounts (or attempting to) in a short period of time is a red flag to a lender – it can indicate that you’re planning a spending spree or that you are expecting to lose your job. If you’re planning to apply for a mortgage or other loan where your interest rate is determined by your credit score, try to avoid opening any new credit cards at the same time.
  • The number and type of accounts. There are such things as “good debts” and “bad debts.” Having a mortgage, student loan or car loan looks better (as long as you don’t have late payments on your record), because it implies that you’re responsible enough to maintain a home, go to school and take care of a car. Credit card debt isn’t as flattering – especially a bunch of store cards that are maxed out. Hello, shopaholic!

Finally, make sure you’re checking your credit report annually and cleaning up any errors. The ONLY place to get your federally mandated free reports is at www.annualcreditreport.com.

What other things about credit scores and credit histories confuse you? Let me know in the comments below so I can get you straightened out!


About the Author

Kelley Long

Kelley Long is a CPA/PFS and CFP® who believes that the true meaning of financial security means having choices in life. Formerly the head of her own practice, KCL Financial Coaching, Kelley parlayed the knowledge and experience gained from starting her own business into her dream job as the Director of Communications and Marketing for the Chicago-based CPA firm Shepard Schwartz & Harris. She’s also a volunteer and media ambassador for Feed the Pig and 360 Degrees of Financial Literacy. In Kelley’s perfect world, everyone would feel great talking about their money concerns, fears, questions and problems, because then everyone would see that we ALL have those concerns, fears, questions and problems. Kelley lives in Chicago where she also teaches BODYPUMP group fitness classes at the Chicago Athletic Clubs.

3 Comments


  1.  

    I’ve heard that each time you check your credit score, the score goes down… Is that true?




  2.  

    That is a GREAT question! Checking your credit score requires an inquiry into your credit history, which does negatively affect your score, but it isn’t a huge ding unless you’re doing it over and over.

    Here’s how it works: the next time you access your free annual reports, look at the very end, where it tells you the recent inquiries into your credit report. You’ll see voluntary (like when you apply for a credit card, loan or other type of credit request that you instigate) and involuntary (when banks pull your report to send you offers for promotional rates, etc.)

    The involuntary inquiries do not affect your score, but the voluntary inquiries do. The TYPE of voluntary inquiry can affect whether a lender decides to give you credit or not — if the lender sees that the inquiries were simply you checking your score or were the result of a job-related credit check, then it’s not viewed as “bad.” If you have a bunch of inquiries because you’re applying for a zillion new credit cards, that will be viewed as negative.

    Here’s the other thing: there isn’t a reason to be regularly checking your credit score (which is a number that is based on your credit history) unless you are preparing to apply for a loan and you’re wondering about what kind of rate you can receive based on your score.

    A periodic check of your credit history is necessary to make sure there aren’t any mistakes, but checking your score doesn’t tell you much other than what your “grade” is for your current history. Quite frankly, I don’t care what my exact credit score is, as long as I know that my credit history is accurate and I’m doing the right things to keep it clean.

    Does that make sense?





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