Why your credit score matters
This crazy number can influence your ability to qualify for a loan or credit card. It could mean the difference in whether you can land a new job. Credit scores can determine how much you'll pay in interest when you do qualify for financing. Believe it or not, your credit score can even have an impact on how much you pay for insurance. That's why you need to focus on the things that can really help boost your score—and stop worrying about the things that have no effect.
Checking your credit report
One of the most dangerous misconceptions when it comes to credit scoring is the idea that checking your own credit will somehow damage your credit score. It won't. In fact, you should be checking your credit reports frequently. Sonya Smith-Valentine, Founder and President of Financially Fierce, explains that "many people believe that pulling their credit report will hurt their credit score. Not true! Pulling your own credit report does not impact your credit score." On the other hand, your scores might be impacted when a lender pulls your credit as part of a loan application. This is known as a hard inquiry while credit checks you initiate yourself are soft inquiries. So, it's typically best to only apply for new credit when you actually need it. Credit can be a confusing topic. Learn the difference between your credit report and credit score here.
Paying off a credit card
There are a lot of credit myths surrounding credit cards and how these accounts may impact your score. "Many people mistakenly think that paying off a credit card will lower their credit score," says financial planner Brandon Renfro, an assistant professor of finance at East Texas Baptist University in Marshall, TX. "This stems from a belief that you need to carry a balance in order to build your credit."
However, Renfro continues to point out that the opposite is actually true. "While credit card debt does affect your credit score, a lower balance relative to your credit limit actually improves it."
You know that lenders checking your credit reports too often can be bad for your credit. However, FICO's credit scoring models may not penalize you if you have multiple credit check pulls in a short period of time because you're shopping for the best rate on a loan. Marco Salinas, President of Credit 360 Consulting in San Antonio, TX, explains: "Currently there are three [credit inquiry] categories that the credit scoring system will give special treatment to when you need to shop around to obtain credit: mortgages, auto loans, and student loans. Under these three categories, you are able to have your credit pulled as many times as necessary in a 45-day time period and it will only count against your score as one hard credit pull."
A slightly late payment
Have you ever missed a due date on a loan or credit card by a few days and worried the mistake would hurt your credit score? You're in luck. Jerry Brown, the owner of Peerless Money Mentor, breaks down why you need to be a full 30 days late on your payment before it may harm your credit score. "While I recommend paying your credit card bill on time and in full to avoid interest, depending on your current financial situation, that may be difficult. Life happens. When I was younger, I used to miss my payments a lot," admits Brown. "I'd have to call the credit card company every month to waive the late fee. But, since the payment was less than 30 days late, it did not negatively impact my credit score." As long as your payment is in before 30 days from your due date, your late payment won't be reported to the credit bureaus, he says.
Once upon a time, tax liens had the potential to inflict a lot of damage to credit scores. However, that's no longer the case. "Tax liens are no longer part of your credit report, whether paid or unpaid," explains Leslie H. Tayne, Esq. Tayne, founder and head attorney of Tayne Law Group, PC. "They were removed from credit reports in April 2018." Want to beef up your ranking? Here are some reassuring ways to improve your credit score.
Judgments are another type of public record which can no longer hurt your credit scores, says Tayne. "In 2017, the credit bureaus also eliminated civil judgment records from credit reports." The reason the credit bureaus agreed to remove tax liens and civil judgment records from consumer credit reports is that the information was prone to mistakes and errors. According to Tayne, "Social Security numbers or dates of birth were often missing from public records. As a result, records were often linked to the wrong people, causing issues on credit reports."
This one is tricky. Having too much debt can certainly be a problem financially. Having the wrong kind of debt (like an over-utilized credit card account) could be bad for your credit score too. However, the idea that all debt is bad for your credit score is incorrect. Allison Kade, Millennial Money Expert at the financial site Fabric, debunks this common credit myth. "Having student loans or a mortgage (and regularly paying those loans on time) can actually help contribute to your credit history. Similarly, having a credit card that you use at least occasionally—and responsibly—can actually be better for your credit score than not having a card in the first place."
Employment credit checks
This is another credit check that won't impact your score. Credit scoring systems like FICO and VantageScore will ignore employment credit checks entirely. This is good news because, as Tayne points out, "more and more often, employers are running credit checks on prospective employees. While an employer credit check will show up on your credit report, it will not have an impact on your credit score."
Too many accounts
It's true that you shouldn't apply for new credit cards or loans frequently. However, there's no such thing as too many accounts when it comes to your credit score. "One mistaken belief many people have is that having too many accounts can hurt their credit score," says Andrew Herrig of Dallas, TX, the founder of WealthyNickel.com. Herrig goes a step further: "As long as your old accounts are in good standing, you should definitely keep them open."
How much money you earn
"You'd be surprised at how many people believe that how much money they earn affects their credit score—nearly 25 percent, according to this recent survey," says Mike Pearson, credit expert and founder of Credit Takeoff. "While it's true that your credit reports likely contain information about your present and past employers, they never include your salary information." Credit scores, after all, are based on the information found on your three credit reports from Equifax, TransUnion, and Experian.
Focus on what really matters
A good credit score could easily save you hundreds of dollars per month—here's why. That's why it's worth your time to learn how credit scoring works and the steps you can take to improve your own credit. Although the ten items above won't hurt your credit score, there are plenty of mistakes that could send your score into a downward spiral. If you want to earn and keep a brag-worthy credit score, it's important to avoid all of the following:
- Late payments
- Utilizing a high percentage of your credit card limits
- Collection accounts
Additionally, it's a good idea to check all three of your credit reports frequently to make sure that they're accurate and error-free. Credit reporting mistakes can potentially cause a lot of damage to your credit scores as well. It's up to you to review your reports often and address any problems right away if they come up. You should also be on the lookout for these sneaky things that do affect your credit score.