What Really Matters To Your Credit

July 21, 2015

One of the most common questions I get is how do I improve my credit score. There is so much information on the Internet that people cannot make heads or tails of it. I was talking to my buddy, Kelley, a fellow CFP(R) professional and CPA, and she offered great insight as to what really matters vs. what does not matter to your credit score. Below are her thoughts:

According to Visa, almost sixty percent of people don’t know what determines a credit score. It’s no surprise with media outlets and silly television commercials assailing us with mixed messages about what counts and what doesn’t. Here are five things that you might think matter – but don’t – and five that really do.

What Doesn’t Matter

  • Employment history. Even though the amount of credit card offers I receive skyrocketed when I re-entered the workforce after being self-employed for three years, credit agencies do not track your employment, nor does it 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 that information does not go into your credit history.
  • Interest rates on debt. The lower your rates, the quicker you’ll pay off debt, which does matter. But having higher rates does not ding your score.
  • Assets/savings. Your credit score is based solely on your credit history. Your bank account balance is not a part of your credit history. Rich people have bad credit too.
  • 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. Sorry, but that swank ZIP code won’t do diddly for your credit score if you’re not paying your bills on time!

What Does Matter

  • Paying on time. Whenever anyone asks me how to increase their credit score, my automatic response is, “Pay all your bills on time. Every time.” One late payment can wreak havoc on your score. You’d be surprised by how many wealthy people struggle with this one!
  • Amounts you owe. The balances of your accounts relative to your credit limits definitely makes a difference on your credit report. The closer you are to maxing out, the worse the effect.
  • How long you’ve had credit. It’s called a credit history for a reason. The whole purpose is to help a creditor decide if they should lend you money. The further back you can demonstrate that you regularly pay your debts back, 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 a slew of new 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 opening any new credit cards at the same time.
  • 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. Credit card debt isn’t as flattering – especially a bunch of store cards that are maxed out. Hello, shopaholic!

Finally, make sure you’re looking at your credit report annually and cleaning up any errors. The ONLY official place to get your federally mandated free reports is at www.annualcreditreport.com. Make sure you check it out since it definitely does matter.