Fact or Fiction: What Does and Doesn't Affect Your Credit Score

A woman holding a handful of credit cards.

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How much do you know about what affects your credit score?

Credit scores may not be shrouded in mystery, but they're not exactly easy to understand either. And the complexity of credit scoring systems means there's a lot of misinformation regarding what affects your score.

Unfortunately, that misinformation about your credit score can cost you. It may lead to a lower credit score, meaning you'll pay higher interest rates and have more trouble getting approved on credit card or loan applications.

Consumer beliefs on what affects their credit scores were investigated in Equifax's 2019 Financial Literacy Survey. Here's a closer look at the factors that do and don't affect your score, along with the number of consumers who got each of these right.

Fact: How much you owe on credit cards

The amount you owe on any revolving lines of credit, such as credit cards, compared to your total balance is known as your credit utilization. It is one of the biggest components of your credit score calculation. With the most widely used type of credit score, the FICO® Score, credit utilization counts for 30%.

To avoid hurting your credit score, you should keep your credit utilization under 20% to 30%.

Approximately 71% of consumers knew that this affected their credit scores. That's not terrible, but it does mean 29% didn't know about this critical scoring criteria.

Fiction: Checking your credit report

Of those surveyed, 26% of consumers believed that checking their credit report would affect their credit, which is completely untrue. You can check your own credit score as often as you want without harming your credit.

It also doesn't affect your credit to request your credit score from each of the three credit bureaus. However, you're only entitled to one free credit report from each bureau per year, and if you want more, you will need to pay a fee.

Fact: Opening a new credit card account

When you apply for any type of credit or loan, the creditor will run a hard credit check, meaning they pull your credit report before deciding to approve or decline your application. Only 54% of consumers realized this lowers their credit score.

Hard credit checks don't decrease your credit score that much. With a FICO® Score, the average drop from a hard inquiry is less than five points. But these can add up if you submit multiple applications for new credit in a short period of time, unless you're rate shopping for the same type of loan. In that case, FICO allows you to shop around without lowering your credit on each application.

Fiction: The interest rate on your credit cards and loans

Interest rates on loans are very important, since they determine how much that loan will cost you. They can be important on credit cards, as well, but only if you carry a balance on your card. If you pay the statement balance in full every month, then the interest rate doesn't matter.

Where interest rates aren't important is your credit score. They have no effect on your credit, even though 22% of consumers believe they do.

Fact: How long you've been using credit

With your FICO® Score, the length of time you've been using credit counts for 15%, making it the third-most-significant factor. Less than half of consumers (46%) knew this, which is a serious issue. If you don't realize that the length of your credit history matters, you may end up canceling cards you've had the longest, which can cause a big drop in your score.

Fiction: A change in salary

Credit card companies do ask for your income when you apply for a card, but that's simply something they use to decide if they'll approve your application and how much your credit limit will be.

Contrary to what 14% of consumers believed, a change in salary won't lead to a change in your credit score.

Fact: The types of credit you have

Credit mix is one of the scoring criteria used by credit bureaus. It's better to have both revolving lines of credit and installment loans instead of only one of the two.

This is another area where many consumers are in the dark, as just 45% knew their credit mix mattered. On a positive note, you don't need both types of credit to attain an excellent credit score. Even though my credit history is entirely made up of credit cards, I've been able to maintain a FICO® Score of over 760.

Fiction: Your motor vehicle record

Whether you have a good or bad driving record, it won't do anything to your credit. The 10% who thought it would may have misunderstood because credit scores can affect auto insurance rates. Not every state allows this, but the majority let auto insurance carriers check drivers' credit scores and use those scores as one factor in setting their premiums.

The truth about credit

There are still plenty of areas where consumers are misinformed about credit scores, which can lead to lower scores and higher interest rates. If any of these facts and misconceptions were surprising to you, then now is a good time to review how credit scores are calculated so that you know how to improve yours.

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