Confused about credit? So are a lot of people. Let’s fix that

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Confused about credit? So are a lot of people. Let’s fix that


Does your salary impact your credit score? How about your age?

According to a June 2016 TransUnion survey of 1,615 U.S. consumers, a lot of people think so -- but this isn't the case.

Over half of survey respondents who checked their credit score in the past 30 days mistakenly identified salary, age and employment history as factors that contribute to their credit scores.

So what are the factors that actually make up a credit score? Read on to find out.

What's in a credit score?

Below are the factors that are typically used to calculate your credit score, by the level of impact they can have on your score. Because there are different credit scoring models, how factors are weighted can vary slightly from model to model.

Jeff Richardson, vice president of marketing and communications at VantageScore -- one of the two main credit-scoring models in the U.S. -- says, "regardless of the model, there are a number of tried and true ways to get a good credit score and maintain it."

High impact

Credit card utilization: This percentage shows how much of your total credit card limit you're using. It's determined by dividing your total credit card balance by your total credit card limit.

Lenders generally like to see that you aren't using too much of your available credit; the more credit you use, the harder it may be to pay back. So it's generally recommended that you keep your utilization under 30 percent.

Why 30 percent? According to Richardson, it's been statistically proven that individuals who have higher utilization than this total may be more like to default than those who keep their balances low.

He says that having available credit can help in the event that something unexpected arises which you then have to pay for. With that credit, you may be less likely to overextend your finances and then become late on your payments, or even default.

So while you have a credit limit, you should try not to use it all unless necessary.

Payment history: This is a percentage that represents how often you've made on-time payments. Paying bills on time can show lenders and creditors that you're reliable and more likely to pay back your debts.

Late or missed payments can significantly harm your credit score, so it's important to try to pay all your bills on time.

Derogatory marks: These can include accounts in collections, bankruptcy, foreclosure or tax liens and can severely hurt your credit score as well as remain on your credit report for up to seven years.

Medium impact

Age of credit history: This factor shows how long you've been managing credit. It doesn't refer to -- as some may think -- your actual age.

Some scoring models base this factor on the average age of your open accounts (credit cards, mortgages, auto loans, student loans and other lines of credit) -- this is what you see on Credit Karma.

Others look at both open and closed accounts or just your oldest account.

The longer you manage your credit responsibly, the more you demonstrate your creditworthiness to lenders.

Low impact

Total accounts: This refers to the number of credit cards, loans, mortgages and other lines of credit you have.

Lenders generally like to see a mix of accounts on your report because it shows that other lenders have trusted you with credit.

Hard inquiries: Hard inquiries usually occur when you apply for a new line of credit, such as a loan, credit card or mortgage, but can also take place when, for example, you rent an apartment.

A lot of hard inquiries on your credit report may suggest that you're desperate for credit or aren't getting approved by other lenders.

Hard inquiries can slightly lower your credit score. It might seem counterintuitive: To build your credit, you need lines of credit -- so why should your credit score take a hit because you applied for a new account?

Richardson says that any time you take on a new credit obligation, there's an element of risk involved. Credit models see that and want to understand if you're able to handle that new obligation.

After you've made on-time payments for a few months, the impact of that hard inquiry should go away or diminish, he says.

He also adds that with many hard inquiries, the penalty is around five to 10 points -- depending on the other data in the credit file.

What's not in a credit score?

As mentioned above, salary, age and employment history don't factor into your credit score.

Other things that don't go into your score include:

  • Race/ethnicity
  • Religion
  • Nationality
  • Gender
  • Marital status
  • Where you live
  • Your total assets

Also, while soft inquiries may be included on your credit report, they don't affect your score. These generally occur when a person or company checks your credit report as part of a background check -- for example, employer background checks, getting pre-approved for credit card offers or checking your own score.

How can I further understand credit scores?

Consider signing up for Credit Karma, where you can see your credit scores and credit reports, as well as learn more about how your scores are calculated.

You can also access educational tips on the Credit Karma app or site as well as articles about how to manage your credit.

Bottom line

Though a lot of credit misconceptions exist, credit doesn't have to be hard to understand. By recognizing the basic credit factors that contribute to your score, you can learn how to maintain and improve your credit health with confidence.

About the Author: Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over). Follow her at @MikaBhatia!

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Student loans is it better to consoidate them or just pay on them separate???

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