Your credit score may not be something you think about every day, but when you go to apply for a loan, rent an apartment, or lease a car it suddenly becomes top-of-mind. During crucial moments like these, you may not know what that number is – or what has shaped it up to this point.
“It isn’t just about buying a house or getting approved for a car loan anymore,” says U.S. Bank Branch Manager Nancy Smock. “Even cable companies and cell providers are starting to tune in to your credit score.” It’s true that more businesses are looking into that all-consuming number in order to get an understanding of your financial health. And even if you get approved for a loan or a car with your credit score, Smock says you might still be hit with a higher interest rate if your score is on the lower side.
“Your credit score plays a greater role than it ever has in determining how much freedom you have to make purchases and build wealth,” agrees Personal Banker Anthony Marengo. “Unfortunately, there are still plenty of mixed messages out there about what actions actually affect that score.”
That’s why, with the help of our experts, we’ve created a list to help separate the rumors from the reality. What really affects your credit score and what’s plain fiction? Let’s take a look.
Depending on your locale, costly parking tickets may or may not be part of your reality. But in certain cities, failing to plug the meter on time (or worse – parking in a forbidden zone) can put a major dent in your budget. The good news? That $150 trip to brunch in the city might be tough to swallow, but at least it won’t bite you back on your credit score.
The bottom line: Your credit score fares far better than your wallet when it comes to parking faux pas.
The charges you face when your account dips below zero vary depending on a variety of factors. Thankfully, though, they’ll never drag your credit score down. Still, failing to pay them back – or abandoning the account entirely – could send you into bank collections.
And that, says Smock, is “One of the worst things you can have sitting in your credit history. Bank collections stick around for seven years.”
The bottom line: The number and cost of your overdraft charges doesn’t hurt your credit. But not paying them definitely does.
Keeping tabs on your credit score can help you stay in that healthy range of 30 percent credit usage, says Marengo. “What brings it down are hard inquiries, also known as ‘hard pulls,’” he cautions. “Applying for a lot of credit in a short period of time can significantly affect your score. It can cause even more problems if you’re in the process of trying to get a loan for a mortgage or another major investment.”
A hard inquiry or “hard pull” happens when someone other than you does a credit check to determine whether or not you’re worth the risk of lending to.
You trigger a hard pull when you apply for any of the following:
● Personal loan
● Auto loan
● Student loan
● Credit card (including retail cards)
● Apartment rental
A hard pull also happens if you request your exact credit score via one of the three reporting bureaus (Experian, Equifax and TransUnion).
What are some examples of soft pulls (non-credit affecting)?
Soft pulls, on the other hand, do not lower your credit score. Examples of soft pulls/inquiries include:
● Checking your credit score, via free services like Credit Karma
● “Pre-qualified” credit card offers
● “Pre-qualified” insurance quotes
● Employment verification (background checks)
The bottom line: Not sure how a specific inquiry will affect you? Just ask. Talk to the company or credit card issuer, so you don’t risk any hard pulls you aren’t ready for.
“A lot of people think they have good credit because they always pay with cash,” says Marengo. “In reality, if you only pay cash, there’s no way to track your payments. So even though it can be a financially responsible practice, only paying in cash doesn’t help your credit at all.”
The same is true of using the “credit” function on a debit or bank card. As with cash, when you use the debit function, you’re spending money from your bank account; not borrowing on credit. Your debit activity doesn’t get reported to the credit bureaus, so it doesn’t show up in your score or on your reports.
The bottom line: Using credit (responsibly) is a good way to build credit.
Okay, so using credit is important (see point above). Lenders need a record of how well you manage your credit, so they know you’re worth the risk. But at the same time, using a high percentage of that available credit sends up a red flag.
“A good rule of thumb is 30 percent credit utilization, which leaves 70 percent always available to you,” says Smock. “That ratio shows your good habits, and gives them something to go on. But it also shows you have some restraint.”
Important: Don’t take that 30 percent credit utilization rule as an open invitation to apply for more credit just to artificially lower your ratio. Remember that applying for a credit card in the first place also brings down your score.
The bottom line: Keep the majority of your available credit untouched, to show you’re using it as a smart wealth management tool instead of a financial crutch.
Helping your adult child build their credit. Joining forces with your spouse on a mortgage. Life is full of wonderful reasons to co-sign on loans or other monetary ventures. But be aware of the other person’s finances before you jump in with both feet.
“Just make sure you know what you’re signing up for,” says Smock. “A good rule is to never cosign for someone who isn’t family, because you’re responsible for that loan. Even if you’re ‘just a co-owner,’ that other person’s failure to pay will show up on your credit report as well as theirs.”
Let’s say you’re a parent wanting to help a child build credit history. “There are less risky ways to help,” adds Marengo. “Secured credit cards that require a down payment make great tools for building credit. Or have your child sign up for direct deposit if their employer offers the option, because it shows a predictable income source in advance.
“Both examples will reflect well on their credit score,” he says. “You’ll be available in an advisory or perhaps financially supportive role, but you won’t be linked to their money management decisions.”
The bottom line: Choose your financial partners wisely – just like commercial lenders do.
“Anyone can fix bad credit,” says Smock. “It’s not impossible; it just takes time. There are people out there ready to help you learn how to pay down your debt as quickly and as painlessly as possible.
“Make use of your resources,” agrees Marengo. “If your bank is your resource, get down there and talk to them. Or seek out the online tools your credit card companies offer. Don’t be afraid to ask questions until you understand what you need to do, and how to do it.”
If you have questions or want to know more about how to build credit responsibly, make an appointment with a U.S. Bank personal banker today.