With a shaky economy and tightening credit terms, it can be easy to be paranoid about your credit score. If you’re planning a major financing or recovering from bad credit, it’s not unsurprising that you’d be as self conscious and mindful about your credit score as a supermodel would be about her (or his) weight. But you can’t let the fear of straying from that ideal number rule your life. Just controlling your waistline is a matter of understanding the effects of diet and exercise on your body, keeping you credit health on the up and up is a matter of understanding what kinds of events affect your credit and which do not. Read on to learn about five things that don’t affect your credit score range.
1. Soft Pulls
While looking over your credit report (which you should do once a year – the government gives you a free credit report every 12 months), you may have noticed some unfamiliar inquiries into your account. Even though “number of recent inquiries” does appear on FICO’s list of items that affect your credit score, you shouldn’t worry about the bulk of the inquiries that appear on your credit report. This is because, unless you authorized the inquiry, all retrievals of your credit history are considered “soft pulls” and do not affect your overall credit score. They are simply shown on your credit history for your information. FICO classifies three types of “soft pulls”:
- “Promotional inquiries” that are initiated by lenders to “pre-screen” you to see if you are “pre-approved” for a credit card. If you are, they’ll send you junk mail, but it won’t affect your credit score.
- “Administrative inquiries” that are initiated by lenders with whom you already have an account. These are done just to review your account with them and aren’t a red flag to other companies.
- “Consumer initiated inquiries” are when you retrieve your own credit history and obviously don’t affect your score.
FICO also will not ding you when your employer checks your credit history, as this is standard operating procedure for some pre-employment screening.
So what is FICO referring to when it mentions “recent credit inquiries” and why does anyone care? Basically, this is a gauge of how many loans you actually applied for. If you tried to sign up for 6 credit cards in one year, that’s a bit fishy. It means either (A) you are borrowing irresponsibly or (B) you are getting rejected for credit cards. Note, though, that some utility companies, banks and phone service providers also do hard pulls. But don’t worry – “recent credit inquiries” is only a fraction of the “new credit” piece of the pie that composes 10% of your overall score. If you are still worried, check out this list of companies that initiate hard pulls on your account.
2. Your Age, Race, Creed, Gender or Marital Status
Ever feel like you got snubbed for a loan because you were a 75 year old atheist, Pennsylvanian, polygamist, celibate, hermaphrodite who voted for Kodos? If you did, then it’s probably not true and definitely not because those things showed up on your FICO score. While some lending institutions – that is the banker or loan officer sitting across the desk from you who says “No” based on his or her own judgment – may be guilty of redlining, FICO recognizes that “U.S. law prohibits credit scoring from considering” race, color, sex , religion, national origin, and marital status “as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.” So, know that while people may be prejudiced, your credit score is not.
3. Credit Counseling
If you are in over your head in debt, you may need to seek professional help from a credit counselor. This is a difficult decision as it takes a certain amount of initiative and pride-swallowing. The concession of retaining the services of a credit counselor is nearly akin to declaring bankruptcy in that you are admitting that you are unable to handle your liabilities on your own. But unlike bankruptcy, signing up for credit counseling does not appear on your credit history and does not affect your credit score. This is because you are not receiving any protection from the law or declaring any kind of change in your status. You aren’t liquidating your possessions or formally stating that your liabilities surpass your assets. You are merely seeking advice and guidance from a private party. While hearing that you have had credit counseling may make a loan officer believe that you’ve had problems with debt, this is purely a subjective call on the lender’s part. FICO has no idea whether or not you’ve had counseling, and thus won’t factor it into your credit score.
Note, though, that some of the measures that your credit counselor suggests may indeed affect your score. If they recommend a debt consolidation loan, refinancing or bankruptcy, then these things will very likely affect your score. A reputable credit counselor will fully apprise you of the repercussions before asking you to proceed.
4. Authorized Users
On the topic of debt counselors, one recent change to FICO’s scoring has effectively put the bushel over a common quick fix for bad credit that was commonly employed by disreputable credit repair institutions. Up until August 2009, you could sign up an “authorized user” to your account with a better credit score than yours and your FICO score would see a significant increase. This method of “piggybacking” on the good reputation of another user has since been put to rest by FICO 08. So, if a credit counselor or debt repair whiz suggest the strategy, decline for two good reasons: (1) it’s unethical and (2) it doesn’t work.
5. “Any information that is not proven to be predictive of future credit performance.”
On FICO’s list of “What’s not in your credit score” there’s a catchall item that reads “any information that is not proven to be predictive of future credit performance.” So, what does this mean exactly? It includes quite a few things – all of which won’t appear on your credit report:
- Your employment history and your level of income. This can get reported in government surveys, standardized tests, employment applications, medical forms and more, so it’s easy to feel like “they” might be using this information against you. But fret not – this data is usually collected for statistical analysis and does not affect your credit score. In fact, it’s illegal. That’s not to say that you are entitled to a loan if you’re unemployed – again, that’s the loan officer’s call and has nothing to do with your FICO score.
- Rental agreements. Some people believe that they are stereotyped as low income individuals if they rent rather than own their homes. While a lease is a legal document and some landlords may pull your credit report, the fact that you are a renter doesn’t affect your credit score. Now, if you default on your lease and the items is sent to collections, then you’re busted. But if you are a responsible renter, then fear not.
- State or city of residence. True, your credit report does show your current address. But that has no quantifiable affect on your likelihood of repaying your loans or not. Don’t worry – living in Las Vegas doesn’t flag you as irresponsible.
- Interest rates on your other accounts. Experian, TransUnion and Equifax don’t tell lenders what kind of interest rate you are being charged. FICO doesn’t care either. If all your interest rates seem to be hovering around the same number, it’s likely because your lenders used similar formulas to arrive at the number, not because they are in cahoots.
All in all, it’s better not to be paranoid or overly clever about your credit score. Just like eating in moderation and getting plenty of exercise is the best way to stay slim and fit, controlling your spending and matching your lifestyle to your income is the best way to keep your credit healthy. While FICO’s formula isn’t exactly public knowledge, it’s not quite as mysterious as we all believe it to be. Practice common sense and responsible spending habits and you’ll have little to worry about.
This is an article from Jonathan over at MasterYourCard.com where he talks about money, credit cards (what else?) and lots of other finance related topics.