Credit scoring models and factors that do/don’t influence your credit score are confusing concepts for many consumers, especially with recent changes to scoring practices (e.g., medical debt no longer factoring into credit scores). You probably already know of the major factors influencing your credit score – low credit utilization, on-time payment history, etc. – but what about the little-known factors that could also impact your credit score?
Things That Impact Your Credit Score
Let’s take a closer look at 7 surprising things that can affect your credit score for better or for worse.
Paying Off a Major Loan
A common reason why credit scores drop and impact your credit score involves the closure of an account, such as when you cancel a credit card after paying it off or when you finish paying off an installment loan (student loan, personal loan, auto loan, etc.).
It seems wildly paradoxical that something as financially rewarding as paying off a major loan can actually ding your credit score – due to perceptually higher credit utilization now that your loan amount is wiped from your records – but this drop tends to go away within a short period of time.
Too Many New Lines of Credit
Did you know that your FICO score is based on the average length of your credit history, not the overall length? This means that you could be dinged for opening too many new accounts in two different ways: the number of hard credit pulls (how many lenders are checking your credit report) and the average length of credit history.
If your oldest account is 15 years old but most of your loans and credit cards were taken out within the past 3 years, then your average credit history’s length will be substantially shortened as a result.
Missing Rent or Utility Payments
This category is tricky in that there’s no advantage for consumers but there are potential disadvantages associated with your timely (and in-full) rent and utility payments. Landlords and utility companies rarely report these payments to the credit bureaus, which means you won’t see a bump in your credit score for maintaining an excellent track record – but they will show up on your credit history if you miss multiple payments and a debt collector is brought in to get you to pay up.
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Lack of Credit Diversity
The types of credit you have in your name can also impact your credit score. For example, if you have no loans and several credit cards, your score could be dinged for a lack of diversity in your credit history.
Of course, you shouldn’t take out loans just for the sake of taking out loans – instead, wait for opportunities to arise in which taking out a low-interest loan would make sense for your situation.
Only Paying with Cash
Some personal finance gurus constantly rave about the “cash-only lifestyle,” and while this could make sense for people with a checkered history of responsible credit usage, it’s not ideal for anyone who wants to improve their credit score. Not only could long periods of inactivity lead to your account being shut down (thereby reducing your available credit and increasing your credit utilization rate at the same time).
But, you could also hurt your credit score by not actually using credit. To avoid this dilemma without risking more credit card debt, put a few minor, recurring expenses on your credit cards and set up auto-pay to ensure the statement balances are paid off every month.
Authorized User on Another Person’s Credit Card
If you have a poor or fair credit score, being added as an authorized user on a household member’s credit card can help you improve your credit score (assuming the person who adds you to their account has good or excellent credit). Authorized users aren’t weighted the same as primary users on an account – since only the primary user is responsible for paying off the debts – but this is still an optimal strategy for building your credit score with the help of someone you know and trust.
Have you ever gotten balance transfer checks in the mail before? Some people mistakenly believe they’re just a scam and throw them away, but this can present a useful opportunity for consolidating debts with a reasonable interest rate (as long as you do your research beforehand!). Some credit card issuers offer low or even 0% interest on balance transfers for a designated timeframe (6-18 months, usually), which can help you save quite a bit of money on interest.
The downside to balance transfers is that your credit score may decrease as the result of a higher credit utilization ratio. For example, if you consolidate debts across 3-4 credit cards with a $9,000 balance transfer on a card with a $10,000 limit, you’re just $1,000 away from maxing out the card (90% credit utilization ratio – yikes). Another downside to balance transfers is that many of them come with fees (typically 2-3% of the balance transfer amount), so be mindful of the costs involved before considering a balance transfer.
Understanding the factors that impact your credit score is important for avoiding common pitfalls and myths (“Carrying a balance is better than paying off your statement balance” anyone?) and strategizing to improve your credit score. As long as you’re being responsible with your credit, paying off most/all of your balances before/by their deadlines and spacing out your new credit applications, you should be well-positioned to hit the good/excellent credit score tiers within a couple of years, if not sooner.