With so many rules to follow and myths to debunk, credit scores can be pretty mystifying. Even so, having good credit is essential for everything from borrowing money to finding a place to live.
It pays to know how your credit score works. That means understanding what doesn’t affect your score just as much as what does. And you might be surprised by what that includes.
How credit scores are calculated
Before we get into what doesn’t impact your credit score, it’s helpful to review factors that do go into the calculation. You actually have dozens of credit scores, but the one most commonly used by lenders is your FICO credit score:
- Payment history (35 percent): The most important factor in calculating your credit score is your payment history. Paying your bills on time is one of the best ways to improve your credit score.
- Amounts owed (30 percent): It’s important not to borrow too much or max out your credit cards. Try to keep your credit utilization under 30 percent, if possible.
- Length of credit history (15 percent): The longer you’ve been using credit, the better, because it shows you have a proven track record of managing debt responsibly.
- New credit (10 percent): Opening a lot of accounts in a short period of time can be a red flag that suggests you’re unable to manage your bills. Space out applications for credit cards and loans over time.
- Credit mix (10 percent): Lenders like to see that you can handle different types of credit. To improve your credit score, aim to have a variety of credit cards and loans.
Now that you understand the basics of how your credit score is calculated, let’s take a look at what doesn’t actually affect your credit score.
1. Checking your own credit
Whenever you apply for a credit card, loan, or apartment, or find yourself in any other situation that requires a full credit check, it results in a “hard inquiry.” These stay on your credit report for two years, and usually only take off about five points or less. However, hard inquiries can have a bigger impact if you have a short credit history or few credit accounts. It’s a good idea to minimize the number of times you apply for new credit within a two-year time period (unless you’re rate shopping).
But when it comes to checking your own credit, there’s no need to worry; this results in a “soft inquiry,” which has no impact on your score. In fact, keeping tabs on your credit score is an important habit that can help you catch errors on your credit report or potential fraud.
2. How much you earn
Your credit reports will usually have information about past or present employers, according to Dan Mahoney, a certified financial planner and owner of True Square Financial in Atlanta, but that information isn’t relevant to your credit score.
Though your income can have an effect on your ability to pay back your debts, how much you earn isn’t considered when calculating your score. You can have good (or bad) credit whether you’re loaded or unemployed ― it’s all about how you manage your bills.
3. Your education level
Just like your income, where you went to college ― or whether you went at all ― has no bearing on your credit score. An Ivy League graduate has the same chances of an excellent credit score as a high school grad, as long as they’ve both managed their bills responsibly.
4. Checking and savings account balances
Since your credit score reflects how well you manage debt, other types of accounts, such as bank accounts, aren’t factored in.
“Checking and savings accounts are assets, [while] credit card balances are liabilities,” said Andrea Clark, an accredited financial counselor and owner of The Table Financial Planning. She explained that credit reports and scores gauge the way you use assets to manage your liabilities. “Therefore, only your creditors report activity to the credit bureaus,” said Clark.
Your credit score will take a hit if you miss your credit card or student loan payment. Failing to pay your cellphone or electric bill can ding your score, too. Even an unreturned library book can wreak havoc on your credit. But if you overdraw your checking account and end up in the red, don’t worry: That slip-up won’t be reported to the credit bureaus.
One thing to watch out for, however, is ending up in ChexSystems. Similar to the credit bureaus that track your credit behavior, ChexSystems tracks your bank account activity. If you habitually overdraw, you could be flagged as a problem customer and have trouble opening new accounts or writing checks.
6. Carrying a balance on your credit card
One big myth about credit is that you have to carry a balance from month to month in order to build up a good credit score.
While the amount you charge to your credit card definitely has an impact on your score, it makes no difference whether you choose to just make the minimum payment or pay the whole balance off by the due date. In fact, if you do carry a balance, all you’ll get is a bigger bill thanks to interest accrued.
7. Having utility bills in your name
This one might seem especially counterintuitive. “While utility companies may check your credit when you open a new account, they do not report payment history on these accounts to the credit bureaus unless they become delinquent and service is discontinued,” said Clark.
In other words, you won’t get credit for opening a utility account or paying your bills on time. Screw up and land in collections, however, and your credit score will suffer.
8. Insurance payments
Your credit score matters when it comes to getting affordable insurance, but it isn’t impacted once you secure a policy. “While Insurance companies do check your credit score to decide if they want to take on the risk to insure you, unpaid or late insurance premiums do not impact your credit score,” explained George Acheampong, president and founder of financial planning firm Makes Cents 2 Me.
If you do skip payments, the insurance company will simply end your policy. That could land you in a pretty sticky situation, but at least your credit won’t be affected.
9. Rent payments
For many people, rent is the biggest check they write each month. So, it can be disappointing that simply paying your landlord on time doesn’t impact your credit score.
The good news is that some companies have emerged to change that. If you can convince your landlord to participate, a service such as Rental Kharma or RentTrack will report your payment history to credit bureaus ― for a fee.
10. Going to credit counseling
If you find yourself struggling to manage debt, seeking credit counseling can help you get the situation under control. Talking to a credit counselor won’t impact your credit at all, though they might put you on a repayment plan. If so, it will be reflected on your credit report, but it won’t change your score.
Just be sure you work with an accredited counselor. Some credit counseling and credit repair scams will promise to take over your payments to creditors while they negotiate on your behalf, but instead just take the money and run.
11. Getting married
Getting married means merging many aspects of your life with your partner’s, but credit scores aren’t one of them.
Of course, your score could end up being hurt by your spouse’s poor money habits, such as failing to pay the bill on a joint credit card. But even if you choose to combine finances, buy a house together or file taxes jointly, you will each maintain your own separate credit scores.