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Don’t Buy the Alternative Facts. Here’s What Actually Impacts Your Credit
There’s a lot of advice out there on how to keep your credit score healthy — and as is often the case with advice, much of it is conflicting. So we did some digging to cut through all the noise and find out what really does — and doesn’t — impact your credit score.
Here’s what we found:
Things That DO Affect Your Credit Score
There are many factors at play when it comes to your credit score, but here are seven that have a significant impact.
1. Applying for Multiple Credit Cards at Once
Too many inquiries from lenders in a short period of time looks irresponsible to credit-reporting agencies, and for good reason. According to FICO, a credit scoring company, “people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their report.”
So, if you’re planning a shopping spree and think you’ll save a ton by opening up a store card at each retailer, think again. The temporary discounts probably aren’t worth it.
2. High Balances
One of the factors credit-reporting agencies consider when determining your credit score is your credit utilization (otherwise known as your debt-to-credit ratio). This is a fancy way of saying “how much of your available credit limit you’ve used up.” A high ratio indicates you may be charging more than you can afford.
Whether you have one card or several, be sure to keep the balances low and pay them off fast. Ideally, you should pay them off in full each month to avoid getting hit with interest.
3. Late Payments
Late payments are another indicator you might not be handling your finances well — and the longer your payment has been overdue, the harder it will hit your score. If you’ve always paid on time and just had a momentary mental lapse, remedy it immediately, and then follow these tips to have the creditor remove the late fee from your credit report. Most companies will be flexible if you’ve been a good cardholder up until now.
4. Closing an Old Account… Most of the Time
This one confuses many people, so let’s set the record straight. Closing an old account that’s been paid off for a while will affect your credit score if:
- It’s the oldest of all your accounts. Length of credit history is important, so you never want to close your oldest card unless it’s only a year or two older than your next-oldest card.
- You made your last payment within the last 10 years. Length of payment history also matters, and it goes back as far as 10 years (for good payment history — negative payment history cuts off after seven years). So if you made your last payment on the card anytime in the last decade, keep it open for now to boost your score.
- It increases your debt-to-credit ratio. An open and fully paid account gives you more available, unutilized credit. This is good for your credit score. If closing your old card will significantly increase the percent of available credit you’ve used, reconsider doing so.
- It hurts your credit mix. Creditors and lenders want to see that you can handle a variety of credit wisely. This includes revolving debt (like credit cards) and installment debt (like auto loans, student loans and your mortgage). If you don’t have many accounts, closing one could throw off this mix.
5. Waiting Until the End of an Interest-Free Period to Make a Payment
You bought a new dining room set for your home, and the store gave you 12 months of zero-interest, zero-payment financing. You could wait until those 12 months are up before paying the balance in full without incurring any fees, but you will see a decrease in your credit score if this pushes your debt-to-credit ratio too high.
It’s always better to make small payments toward this type of balance rather than waiting until the end of your interest-free period, especially since delaying could result in you accidentally forgetting to make a payment and getting hit with a late fee and a super-high interest rate.
6. Severely Overdue Fines
Did you know library late fees, unpaid parking and speeding tickets, and overdue rent and medical bills can impact your credit score? They can, if they go into collections. So be just as diligent about paying these debts as you would a credit card balance.
7. Joint Debt
If you know your spouse has a habit of being a spendthrift, don’t open up a credit card with them or make them an authorized user on one of your accounts. Any overdue, maxed-out or nearly maxed-out account that has your name on it can tank your credit score, regardless of who made the purchases.
Things That DON’T Affect Your Credit Score
While there are plenty of factors that can negatively impact your credit score, there are also many issues that people incorrectly think will hurt their score. Here are some of the more common ones:
1. Applying for Multiple Traditional Loans at Once
When applying for large loans, like a mortgage, auto loan or student loan, you want to shop around to make sure you’re getting the best rate. Fortunately, you won’t get penalized for this the way you would if you applied for too many credit cards at once. As long as you make your traditional loan inquiries within 30 days of one another, multiple inquiries won’t affect your score.
2. Checking Your Credit Score
When a lender checks your score to determine if it should give you a new card, that’s a hard inquiry, which does impact your score. But when you (or a potential employer) check your score to see how well you’re doing with your finances, that counts as a soft inquiry. A soft inquiry has no bearing on your credit score because it isn’t an attempt to secure more credit.
3. Home Equity Lines of Credit… If You Pay On Time
If you take out a home equity line of credit (or HELOC) to finance a home improvement, you’re borrowing against the equity you already have in your home, so the lender has a way of getting its money back if you default. As a result, although your credit report will show a HELOC as revolving credit, FICO does not consider it in your debt-to-credit ratio, which plays a big role in the calculation of your credit score.
That said, it is considered when calculating your payment history (which also plays a big a role), so you want to make sure you make your payments on time, or your score could go down. You also want be very careful about opening a HELOC in the first place; since fees and interest can add up fast, make sure you don’t bite off more than you can chew, or you could risk foreclosure.
4. Income/Employment Status
If you lose your job or have take one with a lower salary, it will affect your ability to open a new credit card or obtain a loan, but it won’t affect your credit score — so long as you’re still able to make your payments on time and don’t fall too far behind on your existing balances.
5. Marrying Someone With Bad Credit
Marrying someone with bad credit won’t, in and of itself, impact your credit score — but it will impact your financial future together. You’ll want to work out an aggressive debt-repayment plan to make sure you right the joint ship and don’t go further into debt as a couple.
Kelly Gurnett is a freelance blogger, writer and editor who runs the blog Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do. Follow her on Twitter @CordeliaCallsIt.