What Really Matters to Your Credit Score

Do you know what elements make up your credit score? First, it’s important to know the difference between your credit score and your credit report, which are often confused. Your credit score is based on the items found on your credit report, kind of like how your grades are based on how you did on your homework and class assignments.

In order to get a better grade, you need to improve your homework and assignments. So before you freak out because your score is lower than you think it should be, you need to know how it’s calculated. 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 back in the day, 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 matters. But having higher rates does not affect your score.
  • 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.
  • 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. Sorry, but that swank ZIP code won’t do diddley 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 how many wealthy people struggle with this one!
  • 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, 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 applying for 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. 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. Hello, shopaholic!

Finally, make sure you’re checking 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.) After all, one more thing that can matter to your credit but shouldn’t is someone else’s mistakes.


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