The general understanding of a credit score is that it is a number based on how responsibly you handle your credit. Several factors impact your credit score, and you might be surprised what ﬁnancial behaviors and information actually make a difference.
First, it’s important to know the diﬀerence between your credit score and your credit report. Your credit score is based on the items found on your credit report, similar to how grades are based on homework and class assignments.
Here are four things that you might think matter – but don’t – and ﬁve that really do.
What traditionally doesn’t matter
- Employment history: Credit agencies might track your employment, but that information does not 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 it’s not part of what determines the number.
- Savings account balance: Your credit score is based solely on your credit history. Your bank account balance is not a part of your credit history.
- Your 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: Your location doesn’t affect your credit score. Your payment history does.
What traditionally matters
- Paying on time: “Pay all your bills on time. Every time.” This is the golden rule of credit. Unfortunately, one late payment can signiﬁcantly impact your score. Even high-income people struggle with this one!
- Your credit utilization: The balance of your accounts relative to your credit limits makes a diﬀerence in your credit report. The closer you are to maxing out, the worse the eﬀect. Ideally, you’d keep this ratio to 30% or less, so if you have a $1,000 credit limit, a balance higher than $300 will start to drag your score down.
- How long you’ve had credit: It’s called a credit history for a reason. The further back you can demonstrate that you regularly pay your debts back, the better your score. The advice about keeping a zero-balance card open comes into play here – just to show how long you’ve had it. Ideally, you’d have at least one account that is at least ten years old.
- New accounts and credit checks: Opening a slew of new accounts (or attempting to) in a short period is a red ﬂag to a lender. It can indicate that you’re planning a spending spree or expecting to lose your job. If you’re planning to apply for a mortgage or other loan where your credit score determines your interest rate, try to avoid applying for any new credit cards within 3-6 months.
- 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. Plus, the things that credit bought tend to last longer than the loan, making it good debt. Credit card debt isn’t as ﬂattering – especially a bunch of maxed out store cards.
Finally, make sure you’re checking your credit report annually, at minimum, and cleaning up any errors. (The ONLY oﬃcial place to get your federally mandated free reports is at www.annualcreditreport.com.) After all, one more thing that can matter to your credit, but shouldn’t, is someone else’s mistakes.