Your credit score is vital to your financial future and the implications of every action you take should be considered. There are obvious things that can lower your credit score, such as defaulting on a loan or filing for bankruptcy; while moves that can have a positive impact include paying your bills on time and keeping your credit balances low. But some of the actions you may think can have a negative impact on your credit score will have no effect at all. Here are some examples:
#1 – Overdrawing Your Bank Account
Banks do not report customers who overdraw their bank accounts as a standard practice; even if they do so on a regular basis. But if your account remains overdrawn (especially for a significant amount of time with a large negative balance), they may resort to using a collection agency to collect the money, and that will end up on your credit report. This will certainly have an impact on your credit score.
#2 – Losing Your Job or Taking a Pay Cut
The credit reporting agencies do not take your employment history or income into consideration when calculating your credit score. A millionaires credit report is treated exactly the same as an entry level fast food worker. Although your income may affect your “debt-to-income ratio” and could be used to determine if you qualify for a loan or not, it will have no direct impact on your credit score calculation.
#3 – Checking Your Credit Report
Never hesitate to check your credit report through services such as AnnualCreditReport.com, Credit Sesame or directly at any of the three major credit bureaus. Your credit score WILL NOT be affected, positively or negatively, by personally checking your own credit report. Lenders can’t see these so-called “soft” inquiries when they review your credit report, and they have no affect on your credit score at all.
“Hard” inquiries, on the other hand, can have a slightly negative impact on your credit score. Whenever you apply for a loan or a new line of credit, a hard inquiry is created when the lender pulls your credit report. Although the impact is minimal, it could last up to a year.
#4 – Receiving a High Interest Rate
Many assume that the amount of interest you pay will affect your credit score, but that’s not the case. Getting a lower interest rate will not improve your credit score; and likewise, seeing an interest rate hike will not have a negative impact. It’s true that your credit score influences the interest rate you pay, but not the other way around.
Obligations That Have No Direct Effect
Although paying late on a loan or credit card will certainly have a negative impact on your credit score, other obligations will have no effect on your score at all. Examples include:
- Rental payments
- Insurance premiums
- Utility services
- Cell phone bills
- Alimony or child support
These payments do not get reported to the credit bureaus; however, your credit score can still be affected if you fall behind on any of these obligations and the unpaid account is sent to a collection agency.
With so many different factors being considered by the credit bureaus, it’s easy to get confused about what does, or DOES NOT impact your credit score. Hopefully we’ve cleared up a few of the most common misconceptions, but to gain a full understanding about how your credit score is calculated, visit MyFICO for a full explanation →