In my last post, I discussed methods for obtaining and monitoring your credit report. In this post, I examine what factors go into determining your credit score. Keep in mind that credit reports and scores exist so that creditors can determine how much of a risk you are. Some things you think would be relevant to having a good credit report are not and some things you think wouldn’t be relevant actually are.
For better or worse, a lot of personal and even financial information has no relevance. Even though you might see part or all of your employment history on your report, this isn’t a factor in your credit score. Age, sex, marriage status, assets, race, gender, address, and address history also are non-factors, whether they appear on your report or not.
Savings, checking (including debit cards), and retirement accounts typically don’t appear on credit reports or influence your credit score, unless you have a delinquent account. For example, if you overdraft a checking account, have a negative balance, and don’t pay it back, the bank may close your account and send it to a collection agency. In this case, your credit report and score will be negatively impacted.
The most important factors for a credit score are as follows:
Credit card utilization: Having credit and not using it is a good thing. The magic number is 30%. You want to be using less than 30% of your credit limit on each credit card, as well as less than 30% overall across all credit cards. If your credit limit on a card is $10,000, try not to let your balance exceed $3,000. If you do need to temporarily go over the 30% limit, try to pay your bill early, so that when the statement comes, your balance is under 30%. Bringing your credit-card utilization in line typically results in a higher credit score within a matter of months.
On-time payments: Paying your bills on time is important. This applies to all accounts that show up on your report, including credit cards and any sort of loan. Late payments and non-payments are classified with respect to how overdue they are and how much is owed; being six months late on a $500 bill is worse than being one month late on a $5 bill. Your payment history, good or bad, is removed from your report after a few years.
Derogatory marks: Although missing payments can be considered derogatory, there are many other types of derogatory marks. Bankruptcies, lawsuits, liens, and foreclosures may appear on your report and they can have a major impact on your score. The most common derogatory mark for most people comes from collection agencies. Is a collection agency after you because you didn’t pay your phone or hospital bill or because you defaulted on your student loan? These will often show up on your report and hurt you. Derogatory marks typically remain on your report for 7-10 years, although depending on the account and how it’s addressed, they may be removed entirely with no negative impact whatsoever. I’ll discuss dealing with collection agencies in a future post.
Credit age: While your personal age isn’t a factor in your report, the average age of your accounts is very relevant. You will have a higher credit score if your accounts have been open for a longer amount of time, as this shows a history of responsibility. Whatever you do, don’t even think of closing that rarely used credit card that you’ve had for 20 years! Even after you close an account, whether it’s a credit card or a loan, it will typically stay on your report for 7-10 years.
Number of accounts: Having a lot of accounts, including credit and loans, is typically good as it shows responsibility. Don’t start opening up new accounts just to increase your account number, though; this will both cause a hard pull (see below) and reduce your credit age (see above), leading to a lower credit score! In general, having more than 10 accounts is a good idea. Your account number includes credit and loans, whether they’re open or have been closed in the past 7-10 years.
Number of hard pulls: Hard pulls occur when you apply for a new credit card or loan. They may also occur any time you specifically request a credit-limit increase or your credit is checked for something like car insurance, a cell-phone contract, or setting up utilities at a home or apartment. You’ll know when one is about to occur, because you have to provide your SSN and/or you’ll be explicitly asked for permission to “pull your credit report.” Understandably, if you’ve applied for lots of credit recently, lenders should be more wary of giving you even more credit. Hard pulls are removed from your credit report after two years and their impact to your score is typically low.
The impact of all of the above, whether good or bad, eventually diminishes over time, so it’s to your advantage to fix things sooner rather than later and maintain good practices going forward.
Having a good credit score often leads to a higher likelihood of approval and lower rates on credit cards, loans, and car insurance, although creditors might look at specific aspects of your credit report in more detail and base some decision on other non-credit report aspects. For instance, you might have a stellar credit score, but if you’ve applied for five credit cards in the past month, you may get denied for your next one. Additionally, companies may ask for income information and, if it’s below a certain amount, you may get denied.
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To Kevin Lewis: Maybe you’ve had a bad experience, but that tends to not be the norm. One study a few years back by the FTC showed that 80% of people who disputed negative information that they believed was incorrect were able to have modifications made to their report with respect to the dispute.
How you go about disputing can definitely influence the outcome. Key aspects include the language you use, the proof you provide, who you contact, and your persistence. There are certainly outliers and, in the most serious cases like identity theft, it can be a long and arduous process that may only ever be resolved by time.
I’ll have a post in the future about disputing things on your credit report.
Credit Disputes: Sounds like Kevin might not have the right approach to revising incorrect credit information. I have worked for a mortgage company that receives these credit disputes from the three main credit reporting companies. I can tell you for sure we want to report what is accurate. Not sure why you feel credit reporting companies will profit from erroneous reporting. I’m even more confused that you say their actions are criminal. I would try a different approach if what you have used does not work, perhaps submitting a dispute online. Sorry you have a bitter view towards this and I hope it does improve for you.
Credit card factors: Lou, I have had somewhat different experiences than you list in your article. A while back, I had an issue where a $38 charge went unpaid for about 15 days past the due date. It was an infrequently used card and I forgot that I had put a small charge on it. As soon as I discovered the error, I called the credit card company, explained the situation and paid the full amount due. Even though the amount was small and the time it was delinquent fairly short, my 830 credit score dropped to 720. It went back up in a couple months after I got the issue resolved but my experience is that if you don’t pay at least something by the due date, look for a major hit to your credit score.
Also, I don’t think credit age matters as much as you think. I have fallen below the 5 year average age barrier on several occasions with no real dip in credit score.
As for Kevin, he obviously has had some bad experiences. Like I said in a previous post, his reply was accurate 20 years ago but much has changed.
Credit Scores: Kevin,
According to Value Penguin, 2017 average US credit score was 695, about the middle of the second tier of credit scores and pretty close to the 720 credit score that gets you into the top tier. That doesn’t seem to agree with your conspiracy theories
Kevin: Wow didn’t expect the race card there. You must have gone through an awful experience on a credit score drop. It saddens me to think people believe that big bad companies are always out for them. As long as you can properly back up where the error was made it shouldn’t be an issue. Didn’t realize you were so passionate about this subject. I guess I thought bureaus being audited and monitored maintained integrity but you seem to think otherwise. I know there is inaccurate information at times but I also believe accidents happen. I had a delinquent account show up from before I was born but they fixed it fairly quick. I hope your credit life experiences work out better for you in the future. Over and out. 😀
To Jimmy Jazz: Regarding your late charge, that’s pretty rough. Such a thing is very bank dependent, though. I’ve missed a couple of due dates with no payments (even partial) made. When I’ve called the banks in question they reversed any late charges, didn’t report the payment as late, and even told me that they don’t report late payments under 30 days, so long as it wasn’t an ongoing problem. Both cases were with big banks, but were probably around a decade ago.
Regarding the importance of credit age, I’d consider it of middling importance below the first three things I listed, but more important than your number of accounts and hard pulls. If your other factors are good then the impact on your credit score is minimal. For those who make credit cards more than a hobby then it’s fairly normal to have a low credit age, lots of hard pulls, and still have a credit score over 800.