We often think of a credit score as a snapshot of our finances. It’s meant to provide lenders and other financial services providers with insight into how we might manage our money. With a credit score, someone can get a general idea of how you might handle your finances, and whether or not you are likely to miss payments.
However even though we refer to a credit score as a financial snapshot, there is still plenty of financial information that doesn’t actually affect your credit score.
Remember: a credit score is meant to reflect your history of handling loans. As a result, there is some financial information that doesn’t affect your credit score. Here are 5 things that don’t affect your credit score:
Checking Your Own Score
While it’s true that when you apply for credit, the credit inquiry results in an impact on your credit score, the reality is that checking your own score doesn’t make a difference. You can look at your own credit score as often as you want and it won’t make a difference to your score.
In fact, if a company checks your score for marketing purposes, without you asking for a loan or a credit line increase, it still won’t affect your score. The only time someone checking your score matters is if you ask them to, usually so that you can qualify for a loan or get access to some other service.
Understanding the difference between a soft inquiry and a hard inquiry can help you avoid issues with your credit.
Your income doesn’t impact your credit score. While companies are allowed to use information (like your original mortgage balance) to extrapolate your income, how much you make doesn’t actually change your score. Your score is based on your habits related to loans, not to how much money you make.
Likewise, the assets that you have (such as your savings account balance or your retirement account) aren’t considered as part of your credit score. So, while your payments on your mortgage matter to your credit score, the value of your home doesn’t matter when it comes to figuring your credit score.
It’s important to understand, though, that lenders can still use your income when making decisions. They want to be sure you can afford your monthly payments. That income just won’t impact your credit score.
Any demographic information about you doesn’t impact your credit score. Race, religion, gender, marital status, age, sexual orientation and other factors won’t affect your score. It’s true that you can find reports from various sources that do things like compare demographics and credit scores (and many scoring websites offer you a way to see where you stand against your peers), but this isn’t the same as influencing your credit score. Be careful with these analyses. They can give you insight, but they might also discourage you and keep you from understanding what really matters to your score.
Current Interest Rate
Your current interest rates don’t determine your credit score. This is important to understand. While your credit score can certainly impact your interest rate, your interest rate won’t impact your credit score.
Remember that your credit score is strictly about your payment and other credit behaviors, such as how long you’ve had credit, or how much credit you are already using. Your current interest rate doesn’t usually change your ability to make another payment. How much you owe, and whether you make regular payments, as well as how desperate you seem for credit (as evidenced by hard inquiries) can indicate your ability to repay a loan, and these items are taken into account in your score. But your current interest rates don’t matter in terms of scoring, although they can be indicative of what you can expect to pay on other loans.
It’s important to understand that working with a legitimate credit counselor isn’t going to destroy your credit score. The problem that many consumers run into is that there are some credit companies that promise to help you, and then encourage you to stop paying on certain accounts, or help you settle for less than you owe.
If you stop paying on accounts, or if you settle your debt, this will have an impact on your credit score. Just meeting with a credit counselor and getting help creating a plan to get out of debt, and getting help to make all of your payments in full, isn’t going to affect your credit in a negative way. In fact, getting a workable plan in place and following it can improve your credit score.
However, once you start closing accounts with balances and negotiating settlements, that changes and you could see an impact on your score. Be very careful about the actions you take to get your debt under control. If you need help, make sure to get it, but be aware that some help is better than others.
It’s important to understand what truly affects your credit score, and what doesn’t. This knowledge can help you make better decisions about your finances, whether you are just starting to build your credit, or whether you are trying to dig out of debt and repair your credit after a mistake.
You should carefully consider your options, and think through your financial actions. That way, you can build a good credit score that can help you in the future.