What Really Affects Your Credit Score

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It’s time to talk about good old credit scores. A lot of us don’t really think about our credit score until we need to buy something big. For the average American the first thing in life you’ll need your credit score for is either a car loan or a college loan. Unfortunately when we’re young our credit kind of sucks. That’s because a credit report is a lot like your driving record. You need some history built up before they trust you.

I have to admit a credit score isn’t something I’ve usually worried about. The reason for that is I don’t ever buy anything I can’t afford so I haven’t needed my credit score for anything. When I was 19 I was advised to open up a credit card solely for the purpose of having credit history, despite the fact that I didn’t use it. That helped me the next time I actually did want a credit card and I think it’s helpful for young people if you’re responsible with credit. Let me remind, credit scores are used for the purpose of checking how credit worthy you are. If the score is good you’ll get better interest rates on loans and better terms. Your credit score can also disqualify you for certain credit cards.

Let me also point out the distinction between a credit score and credit report. Your credit report is a list of things that may help or hurt your credit like how many credit cards you have, how regularly you make payments on your debts, or how much total credit you have available to you. The credit score is calculated by a particular formula based off of the credit report. Credit reporting agencies don’t make this formula completely transparent to the public which is annoying. You have three credit scores, one from each of the credit reporting agencies which are Experian, Equifax, and Trans Union. I think there are some misconceptions about what matters on credit scores. Allow me to clear some things up.

How Much Credit You Use Matters

What I’m talking about here is credit utilization. If I have two credit cards, lets say credit card one has a credit limit of $4,000 and credit card two has a credit limit of $2,000. If I’m using $4,000 of credit every month it’ll lower my score. It’ll still lower my score if I’m paying the balance off every month. The reason is that the credit card companies report your balances essentially randomly. They may report at the end of the month before you make your payment so to the credit agency it looks like you’re carrying high balances. The “sweet spot” for credit utilization is generally 30%. An easy fix for this dilemma would be to apply for a higher credit limit on one of your cards. You could also just open another card (with no annual fee) and never use it.

Credit Agencies Like it Long

Going back to our driving record example, credit scores go up when credit has existed for a longer period of time. This is one of the big blunders that people make. Don’t close old credit cards that you don’t use anymore unless the card has an annual fee. If a card isn’t costing you anything to retain but its just sitting around don’t get rid of it. Older accounts make your credit look good!

Debt is Good!

Just in case you weren’t confused yet in the world of credit reporting debt is good. If you carry credit card balances and pay monthly the credit agencies will see that as a sign of credit worthiness. In the same vein, if you have college loans or car loans you pay on, as long as you’re paying them on time, this is seen as a good thing and your credit score will go up as a result. Your credit score will especially go up when you pay off a loan. Ever wonder why you suddenly got lots of credit card applications in the mail after the college loan got paid off? That’s why. Just as you want to keep old credit cards on your credit report, you want to keep old debt on there. Debt will help your credit for a long time even after it’s paid off.

The trouble with debt comes when you’re not paying it. If you’re ever late on payments that will affect your credit score immediately. We refer to this as “bad debt.” If you’re 30 days or 60 days late on a payment you’ll see a ding on your credit score but it shouldn’t affect it for a long period of time. If you’re 90 days or more late on a payment that ding will stay on your credit report for up to 7 years. Additionally, if you have late payments past 90 days on your credit report they’ve essentially done the damage. It won’t help you any to try to get those removed.

That little tid bit is useful for some of you who might have debt in collections. When debt goes to collections the credit card company may be calling and harassing you for their money. If the payments are past 90 days due it may even be advantageous to not pay them; wait longer and finally settle with them for a smaller amount. You can rest assured that your credit won’t get any worse after that initial 90 days.

Keep Credit Inquiries to a Minimum

I think most people know about this. If you apply for a loan or a credit card the company is going to pull credit. This is what we call a “hard inquiry.” Hard inquiries will hurt your credit score if done much more than once a year. Don’t ask me why, it seems like the dumbest rule ever. Sometimes the credit agencies will cut you a break if the inquiries are close together. For example, if you’re shopping around for mortgages you’ll probably have several hard inquiries that month and they won’t ding your credit score. So if you know you’ll be pulling credit a lot try to have those inquiries close together.

Unlike “hard inquiries” you can check your credit score whenever you want for free at CreditKarma.com and it won’t hurt your credit score. It’s good to check your credit often because it might alert you to something you’re inadvertently doing that’s hurting your credit. Also checking credit scores is just another attribute we find in people who are money smart. If you care about your money you should care about your credit score.

Variety is Key

I don’t think people usually think about having a range of different credit sources. This is actually something that helps you. If you have credit cards, college loans, and maybe a mortgage that’s going to improve your score. If you have all of one type, like all credit cards and no loans it isn’t going to do much. It’s strange to write about this because my usual advice is never get in debt unless it’s absolutely necessary. In keeping with that, I’m informing you that having a variety of debt is helpful but you should not try to make that happen just because it helps your score.

Don’t Try to Play the System

As I said earlier the credit agencies don’t make their specific formula known to the public and the reason is they don’t want people to do things just to improve their score. The system is set up so that we go about our lives, accumulating good credit over time. People ask me if they should take out loans when they don’t need them to build credit. For example, you can pay for your new car in cash but you decide to finance it for a year to build your credit. Don’t do that it’s pretty dumb. The amount of money you’re not paying in interest is a lot more valuable than a couple points on a credit score. If your score is approaching 800 there isn’t going to be much you can do that’ll demonstrably change your score anyway. Something that’s not commonly talked about is once your score is at a certain level you aren’t going to see a difference in credit terms. If your score is 800 you won’t get much of a different interest rate than if your score was 850. So don’t be stupid and play games with your score.

I hop you’ll think about your credit score next time you’re thinking of taking on debt or opening a new credit card. Being money smart is checking your credit score regularly. Knowledge is power and it’s all about those small financial moves that make a big difference cumulatively.




  1. Living debt-free is definitely the goal, but using credit cards and paying them off monthly can result in a high 700s score even without other debt.
    Why care about a credit score or use cards at all if you don’t plan to borrow money for anything? 1) many rental card companies won’t take debit cards or make it a huge hassle, and 2) insurance companies use your credit score to help determine your rates, and 3) utility companies use your score to decide if you’re required to pay a deposit. I’m not saying these things are right or even okay, but that’s the way it is.
    Julie@ChooseBetterLife recently posted…Navigating Your Emergency Department VisitMy Profile

    • Elsie says:

      That’s a good point you bring up. Some people who are very financially literate don’t worry about a credit score as much because they know they won’t be borrowing money. However there still are some things you need good credit for outside of borrowing.

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