In “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 TO BUILD WEALTH
* Refinance Your Debt: Whether you have high credit card debt, mortgage debt, or student loan debt, I recommend refinancing your debt to a lower rate with Credible. Credible let’s qualified lenders compete for your business.
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their brand new Retirement Planning Calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Updated for 2020 and beyond.