Money Smarts Blog

Is there anything more complicated and misunderstood than credit scores? With the exception of Ikea assembly instructions, we have to say no.  Even worse it seems like everyone has a different opinion on what does and doesn’t affect your credit score. So what’s a millennial who’s trying to save some money, pay off his/her student loans and still have a life without completely destroying his/her credit supposed to do?

Don’t believe everything you hear, for starters. Bad advice is everywhere. In fact, many things you thought would hurt your credit score can actually help. Here are 7 things you think are hurting your score, but actually aren’t:

1. Not earning enough
Whether you’re bringing home $10/hour or $100,000/year, your credit score doesn’t care. Creditors may ask for your income as a factor in deciding your credit limit or payment, but how much money you make is not actually a factor in calculating your credit score.

Increasing your income may affect your overall financial health and ability to repay your bills, but your income alone won’t help or hurt your score.

2. Paying rent or utilities late
We’d obviously never encourage you to pay any of your bills late. But if you do slip up and miss a payment to the cable company or even your landlord, know that it won’t ding your credit score. On the other hand you probably will get hit with a pretty substantial penalty fee (depending on who you skimped), so don’t make it a habit.

Keep in mind this rule does not apply with credit card payments. A late credit card payment will probably affect your score, your minimum payment and maybe even your APR.

3. Checking your own credit
Checking your own credit DOES NOT hurt your credit score. You should actually be reviewing your credit report at least once a year to make sure it doesn’t have any errors.

A Federal Reserve study found that roughly 1 out of every 5 credit reports contain errors, and in many cases, these errors lower your credit score.

Errors on your credit report, like incorrect contact information or an incorrect payment date, this can lower your credit score. You may be doing everything right, and then someone fraudulently opens a new credit card under your name.

As long as you do so through a reputable source (like annualcreditreport.com), checking your own credit is what’s known as a “soft pull.”

Soft pulls are only visible to you, and can be done without your permission. So if you’ve ever gotten a credit card preapproval in the mail, it’s likely because that lender performed a soft pull on your credit to make sure you’re qualified.

“Hard pulls” on your credit are what make a difference. So if you apply for a credit card or loan, the lender is going to do a hard pull on your credit. This tells the credit bureaus that you’re asking for an extension of credit, and that definitely affects your score.

4. Accepting a credit limit increase
Accepting a credit limit increase is actually a really easy way to increase your credit score. Credit is all about how much banks trust you, and a higher limit means banks trust you more. Specifically they’re looking at your credit utilization – how much you owe vs. how much you have available. The lower your utilization, the better.

If you have a $10,000 limit on your credit card and carry a $3,500 balance, your utilization is 35%. If you accept an offer to increase your credit limit to $12,500, your utilization is only 28%. Most people consider a utilization of 30% or lower to be good. So if you’re looking at a 35% utilization, the only way to lower your percentage is to pay your debt down or increase your limit.

HOWEVER, if you know you’ll just use a credit limit increase as a reason to go shopping, you should probably pass. Bringing your utilization right back to where it was before you accepted the increase isn’t helping you at all.

Keep in mind that if you reach out to your creditors and ask for a higher limit, they’ll do a hard pull on your credit. That’s different than just accepting an offer they make to you.

5. Keeping an old card that you don’t use
Thinking about closing an old card from college you just don’t use anymore? We politely recommend that you do not.

Losing a card actually hurts your score. When a card is closed, its entire average history is removed from your credit report – this is especially detrimental if you’re closing an old card. The longer your credit history, the more trustworthy you look to lenders.

And don’t think that closing an old card you’ve made some mistakes with will remove it from your credit report – it won’t. Good or bad, it stays on your report for an average of seven years.

What you should do with an old card is try to use it at least once a year, just to keep it from going inactive.

6. Not carrying a balance
This is probably the most damaging credit rumor out there. In fact, your goal should be not to carry a balance at all—as in, pay it off in full every month.

Not only can carrying a balance hurt your credit (remember that utilization score we talked about earlier?), but it’s also expensive. If you’re carrying a balance, you’re paying interest.

You need to keep using your cards to keep building credit, so we don’t suggest taking them out of your wallet. Your best bet is to use it, pay it off, and use it again.

7. Opening another card
Opening another card can be a bit of a double-edged sword. It can definitely benefit your score, but if you’re careless you could do more harm than good.

Depending on your credit history, adding a new card can give your score a boost by diversifying the types of credit you have.  It will also increase your overall spending limit, which tells lenders that you’re more trustworthy.

But, if you already have 10 store cards and you’re thinking about adding another one or you’re immediately going to go on a spending spree after opening the card (wherever it’s from), you’re probably not helping yourself at all.  Just like accepting a credit limit increase, opening a new card isn’t beneficial if you can’t keep from spending what you have available.

Want more guidance on how to manage, repair or start building your credit? Drop us a line or stop by any branch. We’re here to help you on your financial journey.