What is A Credit Score?A credit score is also called a credit rating. It is a number generally ranging from 300–850 (in the US) and 300–900 (in Canada) that reflects the probability you’ll repay your debts. Before lenders extend a credit facility to you, they will calculate a score using your credit history. Your credit history will include your credit repayments, types of loans, length of credit history, and your total debt. The score enables the lender to determine the risk level when lending to you.
The higher your credit score, the better your chances of acceptance for credit at the best rates. Generally, a credit score below 640 makes you a subprime borrower and a credit facility extended to you is likely to fetch a higher interest rate because of the greater risk of default. A score of 700 is good enough and can enable a borrower to access a credit facility at a lower interest rate. A score of 800 and above is excellent. So, what’s your FICO® Score? You can find out now with the purchase of your Experian Credit Report for $1 with enrollment in Experian CreditWorks. Even a single late or missed payment may impact credit reports and credit scores. However, there are some less-than-obvious factors that you may be surprised to learn that can also influence your credit (like having overdue library books and unpaid parking tickets). Wait. What? Below, we review these two surprising examples along with a few other little-known things that can impact your credit score.
1. Reporting ErrorsAfter years of effort you have tended to and cultivated the perfect credit score—making payments on-time, diversifying, and strategically using credit. Regardless, your credit report from the national credit bureaus may contain errors. Sadly, these errors can adversely affect your credit score when you make an application for a loan. A study carried out by the Federal Trade Commission revealed that one in every five Americans had a credit report error that reduces their creditworthiness. Some of the common errors include:
- Identity errors. Errors in your personal information—like a misspelled name or incorrect contact information.
- Duplicate errors. As you inspect your credit report, you may discover, for instance, that the same debt has been listed a number of times.
- Balance errors. Your reflecting balance or credit limit could be incorrect.
- Account errors. Errors in the status of your account, like an account that should be open being reported as closed.
2. Overdue Library FinesEven if libraries don’t report directly to credit reporting agencies, they turn over unpaid balances to collection agencies. Debts sent to collection agencies will remain on your credit report for about six years—and these collection accounts can really hurt your credit and will impact your scores as soon as they are registered on your credit report by the creditor and/or collection agency. If you have overdue library balances, clear them in order to protect your credit score.
3. Not Paying Your TaxesTax bills don’t impact your credit score. However, if you use credit to pay your taxes or fail to pay taxes in full, there may be an indirect effect on your credit score which may compromise your eligibility to access credit. This is because scores are generated based on reports compiled at the national credit bureaus. Even though the reports reflect your borrowing, loan repayment history, and legal proceedings (such as filings for bankruptcy or foreclosures), they do not track tax bills or payments. Therefore, whether you pay your taxes on time or fail to pay is not factored in your credit score. However, when you fail to pay your income tax, a federal tax lien can be put on your property. Fortunately, tax liens have not appeared on credit reports since 2018, and so cannot lower your credit score. But this shouldn’t encourage you not to pay taxes as lenders can still discover your tax liens from public record searches in consideration of applications for mortgages or other loans. For some of them, a tax lien can provide ground for denial of your application. It is therefore advisable that you pay your taxes on time.
4. Parking TicketsA parking fine or speeding ticket will affect your credit score only if you’re taken to court for failing to pay it. To ensure that your credit record isn’t affected by parking tickets, pay them as soon as possible.
5. Utility BillsUtility bills won’t appear on your credit reports, not unless you forget to pay them and your provider charges your account or sends your debt to a collection agency. In order to protect your credit score, ensure that your utility bills are always paid for in full.
6. Medical BillsAccording to the National Consumer Law Center (NCLC), hospitals and medical providers can’t report your medical debt directly. But then, they might turn your debt over to a collection agency which might report it to the major credit bureaus.
7. Delinquent Child SupportCollections for unpaid child support can seriously hurt your credit score. Once delinquent child support debt finds its way to your credit report as a collection item, it lowers your FICO score. A court judgement, trade line, and agency collection can damage your credit score.
8. Paying Off a LoanMany people think that it is a good idea not to have loans even when you have a credit card. Unfortunately, that is not the case. Paying an installment loan off early won’t improve your credit score. It won’t necessarily lower your score, either. But keeping an installment loan open for the life of the loan could help maintain your credit score. Credit scoring systems reward clients with a diversity of credit cards and accounts. Besides, revolving debts inclusive of credit cards are given less preference than loans. For instance, if you have several credit cards and you’re servicing a mortgage alongside a car loan, you’re likely to score higher on the FICO score as compared with someone who has a few credit cards, even though the latter likely carries less debt. All the same, don’t go on a loan spree while hoping that you will improve your credit score. Unless you can afford it, you will run into financial troubles.
9. Closing a Credit CardA credit card can be canceled without harming your credit score; however, paying off your balances first is key. Closing a credit card will not impact your credit history, which factors into your score in and of itself. Closing a credit card account decreases the length of your credit history, which is significant as it accounts for 15% of your credit score. The older the account you close, the shorter the credit history and the lower the score. Instead, pay your balances off and keep the accounts open. If you have several accounts and you really must close some, then close your newest. Besides, do not close several accounts at once. Stagger the closure between several months.
ConclusionIf you have plans to borrow from a lending institution, always remember that your credit score is one very significant number that will make or break your creditworthiness. An excellent credit score gives lenders the confidence to access a credit facility to you. It will also lower the interest rate at which you will repay your loan, which means you will pay less for the line of credit that you opt for. The quality of your credit score solely depends on you as the borrower. The bottom line is, if you want the best lending services, be sure to keep your credit score strong. This will open many opportunities for you to access credit if and when you need it. Does your credit score need a ‘boost’? Experian Boost enables you to add your utility and cellphone payments to your credit reports—enabling those without a credit history in need of improvement. to demonstrate that they are financially responsible. Check it out! According to Experian, users who received a boost improved their FICO® Score by an average of ~13 points.
Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.