Your credit score provides potential lenders with an easy way to evaluate your creditworthiness. A high credit score can open a lot of doors, such as buying a car or house. A low score, on the other hand, can make your goals harder to reach.
Not knowing what affects your credit score is akin to trying to ace an exam for a class you never took. With that in mind, let’s take a refresher course on what does and doesn’t affect this all-important number.
What Does Affect Your Credit Score
Five main factors affect your credit score, but none hold more weight than your payment history. This category shows lenders whether or not you’ve paid past credit balances on time, including those for credit cards, mortgages, and student and car loans. It also takes into consideration factors such as how overdue late payments were, the amount of money still owed and how much time has passed since any delinquencies.
Credit utilization refers to the percentage of available credit you’re using. For example, if you have a $10,000 monthly credit card limit but only put $1,000 worth of charges on the card that month, you would have a credit utilization rate of 10%. (Remember, having credit and using credit are two different things.) It’s recommended to keep your rate below 30%, but the lower the better.
Credit History Length
Generally, the longer your credit history, the better. This is especially true if you have a strong payment history. It proves to lenders that you’re likely to continue such behavior in the future. Credit history length includes items such as the age of your oldest and newest accounts, and the average age of all your accounts.
Hard Credit Inquiries
Whenever you apply for a new line of credit, the lender will request to see your credit report in order to determine your eligibility. This is what’s known as a “hard inquiry.” Each hard inquiry will cause a temporary drop in your credit score that usually only lasts for a few months.
It’s good to have a mix of revolving credit, such as credit cards, and installment credit, such as mortgages, car loans and student loans. Credit mix doesn’t have a huge impact on your credit score, however, so you can still have a high score without having both credit types on your report.
What Doesn’t Affect Your Credit Score
Shopping for Low Interest Rates
As mentioned above, applying for a loan, mortgage or credit card will trigger a hard inquiry by the lender, negatively impacting your credit score. Shopping around for lowest interest rates will require multiple inquiries over a short period of time. Fortunately, credit bureaus will recognize you’re simply applying with multiple lenders in order to compare rates and treat it as a single inquiry.
Checking Your Credit Score
Requesting your own credit report results in what’s known as a soft inquiry, which has no impact on your credit score. You’re entitled to one free annual credit report from each of the credit bureaus – Equifax, Experian and TransUnion. During the COVID-19 pandemic, these companies are offering free weekly online credit reports.
Your credit score is yours and yours alone, even after you get married. If your spouse has bad credit prior to your marriage, it won’t impact your score after you tie the knot. That said, it will affect your ability to open any type of joint account, and if said account becomes delinquent, it will appear on your credit report.
Your Income or Bank Balance
How much money you have and are bringing in play important roles in your financial life, but are not reflected in your credit score. Meaning, you won’t have a high credit score simply because you have a high-paying job or hefty savings account, and vice versa. And in turn, any changes to these numbers decreasing won’t affect your credit score.
Note that although you won’t find income or bank balance information on your credit report, lenders will often take these into consideration when deciding if and how much credit to award you.
Using a Debit Card
Debit cards are linked to your own personal bank accounts, so when you use them to pay for something, you’re using money you already own. Since no lender is extending you credit, debit card use has no effect on your credit score. Debit cards can help prevent you from spiraling into debt the way credit cards can. However, since they are not reported to credit agencies, they also can’t help you build credit.
Being Denied Credit
If you are denied a line of credit, it likely means your credit score is less than ideal. However, the actual act of being turned down doesn’t lower your score. There will be a slight dip when the lender requests a hard inquiry into your score, but that’s all.
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