There is a lot of misinformation out there about what elements of your financial life make up your credit score, what effects it and what doesn't. Here's a run-down of the things that do matter as well as common things that people often think matter, but don't.
What matters to your credit score
- Paying on time. This makes up the biggest part of your credit score and even one late payment showing up on your credit report can affect your score for months, sometimes years. If you can't make a payment on time, contact the creditor ahead of time – many will give you a grace period before they mark it as late, but you have to ask first.
- Your credit utilization. The balance of your accounts relative to your credit limits definitely makes a difference on your credit report. The closer you are to maxing out your credit limit, the worse the effect.
- 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 on time, the better your score will be. This is where the advice about keeping a zero balance card open comes into play – just to show how long you’ve had it.
- New accounts and credit checks. Opening several new credit cards or other credit accounts (or attempting to) in a short period of time is a red flag to a lender. It can indicate that you’re planning a spending spree or that you are expecting to lose your job. If you’re planning to apply for a mortgage or other loan where your interest rate is determined by your credit score, try to avoid applying for any new credit cards at the same time. Along the same lines, avoid buying a new car or furniture on credit right before closing on a new home – this can make the bank change their mind about your mortgage!
- 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 store cards that are maxed out. Having a mix of different types of accounts will help your score.
What doesn't matter to your credit score
Many of these items will affect your ability to obtain credit or have a landlord accepts your lease application, but they don't flow through to your actual credit score.
- Employment history. While your current employer may show up on your credit history, where you work or for how long does not affect your credit score. Creditors will often ask about this and some won't lend to you if you haven't held your current job for at least a year, but that information does not affect your score directly.
- Interest rates on debt. The lower your rates, the quicker you’ll pay off debt, which matters. But having higher rates does not affect your score and isn't a part of your credit report.
- 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. Rich people can have bad credit too. You'll have to show your bank statements in order to qualify for a mortgage, so it's certainly a part of some credit applications, but it's considered supplemental information to your credit score and is not reflected anywhere on your report unless you had an account closed due to unresolved overdraft issues.
- 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 address is a part of your credit history, but this is not a factor in the score – you can live anywhere and have great credit!