What Doesn’t Affect Your Credit Score? Dispelling Common Misconceptions

Average Credit Score ChartIn “How To Improve Your Credit Score to 800+” I shared with you five steps to take in order to enter the exclusive 800 Credit Score Club filled with beautiful people, gummy bears, and free massages. It’s good enough to get the most amount of credit at the cheapest rate, but to be elevated to “Tier 1 Datable Status” is just amazing!

Following instructions is probably the easiest path to financial success. Sign your name at the end of the exam. Don’t buy depreciating assets. Listen to your elders. Wait for enough time to pass. Sometimes we do things we think are right, but are actually wrong. Other times we worry about things we’ve done which we think are wrong, but are actually irrelevant. This post is about irrelevancy as it relates to your credit score.

After doing some digging online, I found a site called Totally Money highlighting various misconceptions about what can negatively affect a credit score. I’d like to comment on each misconception, share some of my own, and perhaps get your thoughts as well.

WHAT DOESN’T AFFECT YOUR CREDIT SCORE

* Your salary – One would think there’s a correlation between higher income and higher credit score, and there may very well be, but salary specifically is not a determinant to calculating credit score. On a stand a lone basis, your $500,000 a year income earner gets no extra browny points compared to your more typical $50,000 a year earner. Where salary does come into play is when it comes to debt to income ratios. A high debt to income ratio can hurt your credit score.

* Race, religion, weight, looks, or sexual orientation – Can you imagine if a consumer advocacy group found out that attractive heterosexual male Christians got an automatic 50 point ding on their credit score evaluations? We’d have the scandal of the century! It’s common place for companies to hire more attractive employees over more qualified employees, but this is our credit scores we’re talking about and not some main source of income.

* Medical history – Just like how the Affordable Care Act prevents folks with pre-existing medical conditions from being denied health coverage, it’s good to know that FICO doesn’t discriminate based on your medical history, even if the medical costs are huge and forever.

* Any parking or driving fines – For all you bad drivers out there and folks who refuse to put in a quarter for an extra 10 minutes of time, you’re saved! Get as many parking tickets and traffic violations as you want so long as you pay them off by due date. For those who live in the Bay Area, Golden Gate Bridge toll prices are increasing to $8 btw. Might as well raise tolls everywhere by huge amounts to save the environment.

* Your savings balances – Just like salary, the amount of savings you have isn’t going to come into play, even if you have millions of dollars sitting in a money market account. I know several people with huge savings amounts who have been denied credit due to a high debt-to-income ratio. It’s curious that FICO doesn’t seem to look at NET DEBT where you subtract cash from debt. Absolute debt it is.

* Dealings with child support agencies - You can deal with a child support agency without fear of retribution, but if you are a deadbeat father who hasn’t paid child support in years, surely you’re going to get a knock.

* Your relatives’ financial histories – Unless you went in on a loan with Uncle Bob who hasn’t paid his mortgage in 24 months, you’re good! Good to see that just because you are related to someone with poor financial habits doesn’t mean you’re going to get dragged down with them.

* Your student loan – Go ahead and take out $100,000+ for medical or law school. FICO doesn’t care about your desire to take out a student loan. Just don’t forget to pay it back on schedule or else.

* Rejected credit applications – This is somewhat of a surprise to me as there should be red flags if a person has been rejected on multiple credit applications. However, I think it is fair practice to not ding one’s credit score based on prior rejections because a person could be rejected for a number of different things.

* Reclaimed bank charges and penalties - An overdraft penalty or a minimum balance violation penalty won’t hurt. That said, if you are still banking with a bank that nickel and dimes you with penalty fees, I’d consider looking elsewhere!

* How much you turn over your stock portfolio – For all you active investors out there who are buying and selling equities, don’t worry. FICO doesn’t care if you day trade like a maniac. So long as you don’t go on margin, lose all your principal, and owe massive amounts to your broker and can’t pay all is good.

BIG BROTHER HAS A SOUL

It’s good to see that big brother isn’t going to the absolute extreme to determine your credit score. A good credit score is simply a result of your own financial habits over a set period of time. I personally don’t care so much about building my own credit score anymore because I have no plans of buying more property or taking out a loan to purchase a car.

What I am focused on is building my company’s credit score over the next three years so that it can receive lines of credit at the lowest rate possible if needed. My company is like a toddler still learning how to walk. Eventually she’ll be able to run with the best of them, but only after some training.

Recommendation: You can check your latest TransUnion credit score for free here. I recommend checking at least once a year because roughly 30% of all credit reports have errors. I had a $8 utility bill that wasn’t paid two years ago by my tenants which CRUSHED my credit score by 100 points down to 670. I had no idea this was happening until I checked my score. You might as well check because it’s free. 

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Great reference list! I didn’t know that about student loans or savings account balances. That’s interesting to know about salary itself versus debt to income rations. Makes sense! Thank goodness relatives financial histories because my score would be dragged down for sure by several of my family members (just don’t tell them I told you so) :)

  2. Paul S. says

    A lot of people say you have to make payments to build credit. Not so, the buereaus are only concerned about late payments. An unused credit card is just as good as a credit card that is used frequently and paid off on time. Feel free to pay off your mortgage early. Paying off your mortgage completely will actually increase your score.

  3. says

    Wow, great comprehensive post here! You really covered everything. I think the only thing missing is the myth people believe that says all debt is the same.. not true when it comes to a credit score. Mortgages and auto loans, when you make payments on time, can improve your score (whether or not they improve your financial life outside your credit score may be another story). Credit card debt, however, obviously doesn’t have that same positive influence.

  4. says

    Good to know what really affects your credit score. As someone who recently churned credit cards to get bonuses (though I have stopped as I’m looking to buy a co-op), I know many people who have great credit who are afraid of getting these bonuses thinking that opening up credit lines will hurt their credit score. After some credit card churning, my credit score fell from 800 to 780. I don’t think that’s too bad being that I received free airline tickets, hotel stays and a $400 statement credit.

  5. says

    Great to know. I had no idea about student loans and figure my biggest debt would have a huge impact on my credit. That is really my only debt right now so I guess that will probably help me later on. But honestly I don’t worry too much about my credit score because I don’t really like to take on any big debts. I make sure my credit report is accurate and let the score take care of itself.

  6. Josh says

    Sam,

    I have to disagree with the parking fines statement. I got a parking ticket in downtown San Deigo years ago that I never saw on my windshield. I had recently moved and didn’t get notification of late payment as my mail forward had expired. I subsequently updated my address with the DMV and got a late notice at my new address. I immediately payed the fine and checked my report. There were delinquent payments that negatively affected my score. I explains the situation to the city who agreed to solve the issue directly with the credit agencies. The next month, my score rose 40+ points on all three.

    • says

      Aloha Josh,

      I think you misunderstand. It’s OK to get parking tickets so long as you pay them. Have 100 parking tickets a year, and your credit score will be fine if you pay them all. But if you don’t pay within the required time frame, then surely your credit score will be hit.

      Glad you got them sorted!

      Sam

  7. says

    Revolving credit affects your credit score the most (mortgage, car, student loans, and credit cards) Everything else doesn’t affect it when you’re late. Ex: cable, utilities, cell etc. It only affects if it goes into collections or several months late.

  8. says

    I totally love that the 800+ Credit Score Club has gummy bears. That is completely awesome motivation to get there! Seriously, I’m glad you mentioned that part about student loans not affecting the score- I kind of thought that must be the case since the hubs and I owe a lot in student loans and when we go to get mortgages or preapprovals no one ever seems to care (and we’ve always had great scores). But I was never sure if that was because they really don’t count in the score or if somehow the mortgage people just couldn’t see them on our FICO reports!! LOL

  9. says

    Good points! I would add that utility bills is another that does not affect your credit score. If you are occasionally late, you risk have your utilities turned off.

    Funny, I never worried about my credit score because I jut handles my finances responsibly and the score took care of itself.

  10. says

    Take me to this land of gummy bears and free massages!

    I can’t say I’m terribly surprised with too many of those facts, except maybe student loans. Lucky for millennials though. Thank goodness your relatives’ scores don’t count against you. That would make Thanksgiving dinner pretty uncomfortable….

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