Five things you may not know about your credit score

Credit Sesame discusses facts about your credit score that may help you manage it better for future financial success.

When managing personal finances, few numbers are as important as your credit score. It’s a key factor that lenders use to decide whether to approve your loan applications, set interest rates, and even determine your eligibility for housing or employment. Despite its importance, many people don’t fully understand how credit scores work or how they are calculated.

1. Your credit score isn’t the same everywhere

One of the most surprising aspects of credit scoring is that you have more than one credit score. Different credit reporting agencies (Equifax, Experian, and TransUnion) calculate your score using slightly different methods, which means your score can vary depending on which agency’s data is being used. Furthermore, there are different types of credit scores, including FICO and VantageScore. These different scoring models might weigh factors like payment history or outstanding debt differently, leading to variations in your score.

Tip: When checking your credit score, make sure you know which model is being used to understand where you stand in the eyes of lenders. A ” good ” score in one model might only be “fair” in another.

2. You don’t have to carry large debt to have a high score

Many people believe you must carry large debt or use credit heavily to have a high credit score, but this isn’t true. What matters most to credit agencies is how you manage credit, not how much you owe. Keeping your debt levels low and paying off your balances in full each month can be just as beneficial as responsibly managing a large debt. The key factors affecting your score are your payment history and the amount of available credit you use, also known as credit utilization.

Carrying high balances can harm your score, even if you make timely payments. Aim to keep your credit utilization below 30%, meaning you should only use up to 30% of your available credit limit at any time. Doing this demonstrates responsible credit management without racking up unnecessary debt.

Tip: If you have multiple credit cards, consider spreading your expenses across them to keep your overall utilization rate low.

3. Closing old accounts can hurt your score

Many people think that closing old credit card accounts they no longer use will boost their scores, but the opposite is often true. Your credit score benefits from having a long credit history, and closing old accounts can shorten your average account age, which could lower your score. Additionally, closing a credit card reduces your total available credit, which can increase your credit utilization ratio if you have outstanding balances on other cards.

For example, if you have a total credit limit of $10,000 spread across three cards and close one with a $3,000 limit, you’ve just reduced your total available credit by 30%. If you still carry balances on your other cards, your utilization rate increases, potentially hurting your score.

Tip: Instead of closing old accounts, consider using them occasionally for small purchases and paying off the balance in full to keep them active.

4. Your credit score is affected by more than just debt management

Most people know that debt management plays a role in determining credit scores, but other, less obvious factors also contribute. For example, your credit score can be affected by how many recent credit inquiries you’ve made, whether or not you’ve had a bankruptcy, and even if you’ve had a bill go to collections. Credit inquiries occur when a lender checks your credit report, and too many inquiries in a short time can signal to lenders that you’re desperate for credit, which can negatively affect your score.

On the other hand, “soft” inquiries, such as when you check your own score, do not impact it. Being mindful of how often you apply for new credit or loans is important. Each hard inquiry may knock a few points off your score, so it’s wise to avoid multiple applications within a short period unless absolutely necessary.

Tip: Space out your credit applications and be selective about which offers you apply for. Also, check your report for errors or unauthorized inquiries.

5. Utility bills and rent can boost (or hurt) your credit score

Many people do not know that on-time payments for utility bills and rent can help build your credit score. These payments typically don’t appear on your credit report, but some services now allow you to report them voluntarily. This can be especially helpful for people who don’t have a lot of traditional credit history but have a solid track record of paying their bills on time.

On the flip side, falling behind on utility or rent payments and your account is sent to collections can hurt your credit score. Collection accounts can stay on your report for up to seven years and significantly drag down your score, even if you eventually pay off the debt.

Tip: Look into services that allow you to add utility and rent payments to your credit report, which can potentially increase your score.

Bonus tips for mastering your credit score

Understand how credit scores are calculated

FICO and VantageScore use similar factors to calculate your credit score, but their exact formulas differ slightly. The main factors that contribute to your score are:

• Payment history (35%). This is the most important factor; missing payments can quickly lower your score.
• Credit utilization (30%). How much of your available credit you use at any given time.
• Length of credit history (15%). The longer you’ve had credit, the better.
• New credit inquiries (10%). Applying for new credit can temporarily lower your score.
• Credit mix (10%). Having various credit types (credit cards, loans, etc.) can improve your score.

Knowing how these factors are weighted can help you make smarter decisions about your credit usage.

Monitor your credit regularly

It’s crucial to check your credit report regularly to ensure that all the information is accurate and that there are no signs of identity theft. By law, you’re entitled to one free credit report from the three major credit bureaus every 12 months.

Staying on top of your credit score is the first step to improving it. Even small changes, like paying off a little extra on your credit card balance or resolving an old account, can yield positive results over time.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.