Understanding What Goes into Your Credit Score and What Doesn’t

Credit scores are an essential tool used by lenders, landlords, and others to assess the financial reliability of an individual. However, not all financial information influences your credit score. In this article, we will explore what aspects of your finances do and do not impact your credit score, and how to maintain a healthy credit profile.

What Information Goes into a Credit Score

These five factors make up your credit score. Let's delve deeper into each component:

Monthly Payments

Your credit score heavily depends on your payment history. Consistent on-time payments are crucial. Even being just a few days late can impact your credit score adversely. If you regularly make payments on time, your score can recover over time.

Credit Utilization

Your credit utilization ratio is the amount of credit you're using compared to your total credit limit. Keeping your balances low relative to your credit limit (under 30%) is recommended. This ratio is a significant factor in your credit score.

Length of Credit History

The length of your credit history is another important factor, accounting for 15% of your credit score. The longer your credit history, the better it is for your score. This is why closing old credit accounts too early can harm your score.

Types of Credit Used

Having a mix of different types of credit (e.g., credit cards, loans, mortgages) can positively influence your credit score. Lenders view a diverse credit portfolio as a sign of financial stability.

New Credit Inquiries

Each hard inquiry can lower your credit score by up to 5%. However, multiple inquiries within a short period (typically 45 days) are considered as one inquiry. It’s important to limit these inquiries to maintain a healthy credit score.

What Does Not Go into Your Credit Score

Many people mistakenly believe that activities such as getting evicted, having a civil judgment, or even owning a savings account can affect their credit score. However, this is not the case. Here is a closer look at factors that do not impact your credit score:

Evictions and Civil Judgments

These legal proceedings will not be reported to credit reporting agencies. They do not appear on your credit report and do not affect your credit score. Financial information is what the credit score focuses on.

Banking and Savings Accounts

Your savings, checking, and investment accounts do not show up on your credit report. These assets do not have a direct impact on your credit score. However, maintaining a healthy savings and investment portfolio can contribute to overall financial health.

Insurance

The cost or type of insurance you have does not appear on your credit report and does not affect your credit score. While having insurance is a responsible financial decision, it does not improve your credit score.

Conclusion

A credit score is a numerical summary of your credit history, ranging from 300 to 900. A high score of 750 or above is considered excellent, allowing for easy and quick loan and credit card approvals. Conversely, a score below 550 is seen as too risky for most financial institutions.

Understanding what goes into your credit score and what doesn’t is crucial in maintaining a healthy financial reputation. By sticking to the recommended practices and being mindful of your financial habits, you can ensure a better credit score and access to favorable loan terms.