Credit plays a big role in your adult life. Your credit score affects almost everything you do (financially, at least), from buying a car to taking out a loan for school, and even applying for an apartment lease. Simply put, how well you maintain your credit has far-reaching implications. That’s why any time you spend building up your score is time well-spent.
Unfortunately, improving your credit can be a slow and painstaking process. And just one mistake can easily drop your score by dozens of points if you’re not careful. Keep reading, and you’ll learn about which unexpected factors can affect your credit score (and which ones can’t).
Here’s something that may surprise you: your personal circumstances don’t influence your credit score in any way.
You won’t have to worry about things like your education level, income, employment status, or investment portfolio hurting your credit. The only things that factor into your report are those that deal with how well you manage your debts and payments (more on that below). In the world of personal finance, debt management is the great equalizer.
When calculating your FICO® score, credit reporting agencies take the following factors into account, according to creditcards.com. Your payment history, ranking at 35%, is the most important one. It shows whether you pay your loans and bills on time.
Making up 30% of your total credit score is your credit utilization rate. This number answers the question, “How much of your total credit are you currently using?” The higher the percentage, the less credit you have available to use. You want to keep this number as low as possible—ideally, at 30% or less of your total credit.
The length of your credit history (which—you guessed it—refers to how long you’ve used credit for) accounts for 15% of your credit score. The longer your credit history, the better.
Last are your credit mix (the different types of credit you have, such as loans and credit cards) and new credit (number of lines of credit you’ve opened recently), which each factor in as 10% of your total score. Lenders encourage you to own a variety of different accounts, like credit cards and personal loans. Having a diverse array of credit products (and being in good standing, of course) shows that you’re a responsible borrower capable of managing multiple accounts.
Conversely, you want to limit your new lines of credit. Avoid applying for new credit unless you need to, as doing so could bring down your score.
Some companies take your credit score into account when you apply for a job or lease an apartment. Landlords don’t need to get your permission before pulling your credit report. However, they’re required to tell you if they deny your application or change your leasing terms based on your file.
Employers, on the other hand, must ask your permission before running your credit. Even then, they only get access to a special report that’s used specifically for employment screening purposes.
Since its creation, companies of all kinds have relied on the FICO® score to determine a potential customer’s creditworthiness. More recently, the VantageScore® model has also become popular. In 2006, the three main credit reporting bureaus—Experian, TransUnion, and Equifax—joined together to create the new credit model as an alternative to FICO, that would be easier for consumers to understand.
The benefit of VantageScore® is that it creates a single tri-bureau model that can be used with a credit report from Experian, Equifax or Transunion. This reduces discrepancies for borrowers looking to understand their credit. And because your VantageScore® can be calculated even if you have slim credit history, it allows you to build your file sooner than possible with the FICO® score model.
That being said, FICO® scores are still the gold standard for most lenders, and VantageScores®, while helpful, are typically seen as a secondary score that can be taken into consideration alongside your FICO® score
In addition to the five factors that dictate your credit score, other hidden pitfalls can bring that number down if you’re not careful.
Closing down an old credit card: Closing an account, especially a long-standing one, can change the length of your credit history. And because your credit history is used to help determine your credit score, shortening the length of your history can cause your score to drop, as well.
Unpaid bills: Not paying for parking tickets, taxes, rent, child support, and even overdue library books can drop your credit score when they aren’t taken care of promptly. And if your city sends your account to collections, you’ll have a difficult time taking that off your record.
Applying for certain services: Signing up for a new insurance policy or cell phone plan can bring your credit score down by a few points. This is because these companies run a hard credit inquiry (which has a slight negative impact on your score) as part of the application process.
Cosigning on a credit card or loan: Be selective about who you cosign for. If the borrower misses their payments, your credit score gets dinged, as well.
You may already know that you’re entitled to a free credit report from each of the three credit bureaus every year. But did you know that there’s a way to track your credit score without contacting a credit agency? Credit monitoring services allow you to track your credit over an extended period of time, without ever having to deal with a credit bureau. Some companies, like NerdWallet and Credit Karma, offer these services for free.
They’ll notify you of any changes to your credit, making them helpful for monitoring your score as you build up your file. Additionally, you’ll know right away if your credit score goes down—whether as a result of identity theft, a mistake, or another issue—so you can fix it immediately.
Personify Financial also gives borrowers free access to their FICO® score. All you have to do is log into the borrower portal, and you’ll see it right on your dashboard.
If knowledge is power, understanding your credit makes you a force to be reckoned with.
Luckily, things like your personal circumstances don’t determine your credit score. This means that great credit is achievable for anyone who understands how it works. So, what’s next?
Sign up to get your free credit reports and get started on improving your credit score. Consider signing up for free credit monitoring, too—it only takes a few minutes, and it’s a valuable resource that you can depend upon for years to come.
FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries. VantageScore is a registered trademark of VantageScore Solutions, LLC.