I recently wrote about why I don’t think your credit score is a good indicator of whether or not you are succeeding financially. I still firmly believe having a high credit score simply means you are very good at borrowing money and paying it off in a timely fashion. That doesn’t mean I think we should purposely seek to damage our credit, but at the same time too many people constantly play with debt in the name of building a high credit score. Unfortunately, whether I like them or not credit scores do affect our lives in a number of ways. Here are 10 things that surprisingly have little or no impact on our credit score.
1. A change in income
You may be surprised to find out that your income actually doesn’t appear anywhere on your credit report and is not a factor in calculating your score. So if you get a new job making a much larger salary, it will have no impact on raising your credit score. By the same token if you are laid off from your job, your credit score will not go down provided you are able to continue to make your payments on your loans on time.
2. Debit card purchases
Unfortunately, debit card transactions are not counted toward credit score. Since the money comes directly out of your account, you aren’t actually borrowing money (A good thing!). But that means you aren’t using credit. I recently read an article indicating that Jean Chatzky was promoting changes to the way credit scores work that would allow some debit card transactions to be counted. I hope she is successful.
3. Rent payments
While some landlords will request to see your credit report prior to renting their property to you, the other side of that is not true. Making your rent payment on time each month has no impact on your credit score.
4. Insurance, utilities, cell phones
Much like rent some of these companies will check your credit before giving you service; however, your payment history with these companies does not affect your credit score. If your account becomes past due and is eventually sold to a collection agency then that may appear on your credit report and affect your score negatively.
5. Being an authorized user on a credit card
The owner of the credit card can add you as an authorized user on the account and you will then be issued a card in your name and can make charges as if it is your account. However, any activity you generate on this account gets reported against their credit report not yours because it is their account. On the flip side of this, if you are the owner of the account you want to be very careful about adding anyone as an authorized user. It is very dangerous unless there are very clear rules set in place, because they can charge as much as they want and from the banks perspective it will be your responsibility to pay – not theirs.
6. Paying a loan in someone else’s name
This is somewhat similar to the last item. If you make payments on a loan that is in someone else’s name, those payments will not help your score. The payments will always be counted toward the score of the person who owns the loan. So if dad takes out a loan for Jr.’s first car and Jr. makes the payments (or fails to make the payments) it will be counted toward dad’s score not Jr.’s.
7. Making payments to small local merchants
Not all creditors report back to the three credit bureaus. So if you have a credit account with the small local mom and pop hardware store for example, chances are you will not see any activity for that account on your credit score.
8. Shopping for a loan
One of the factors that does affect your credit score are hard inquiries generated when you are requesting approval for a new loan or opening some other credit account. The thinking is constantly opening new lines of credit may be a sign you are struggling financially and will negatively affect your score. However, the formulas used to calculate your score have some logic built-in to disregard a bunch of inquiries made in a relatively short time. What this means is if for example you are looking to qualify for a mortgage or maybe to re-finance your home and you are shopping around to find the best deal? You are much better off to do this over a short period of time as opposed to dragging it out over several months.
9. Having a request for credit denied
You might think that being turned down for a loan would be a major ding to your credit score. Actually, it is not. As already noted, inquiries on your score count, but the actual results of whether you are accepted or turned down are not reported back to the credit bureaus.
10. Checking your credit report
Checking your own credit report has no impact on your score. In fact this is something everyone needs to do on at least a yearly basis. You can get a free copy of your report from each of the three credit bureaus once per year at http://www.annualcreditreport.com.
Credit scores have become imbedded in our society
Like them or not credit scores have become very much entwined in many aspects of our society. As such it is important for us to have at least some understanding of how they work and what affects them.