Monitoring your credit scores and reports has never been easier. With the free tools provided by websites likes Credit Karma and many credit card companies, getting help monitoring and understanding our credit is never more couple clicks away.
Despite this, many consumers are still confused about what in their financial picture actually affects their credit and what does not. While financial health includes much more than just credit, these parts of your personal finances will not affect your credit report or score:
1. Money in the Bank - cash, assets, and net worth have nothing to do with your credit rating. To the contrary, you can be completely financially independent and have bad credit because you never borrow money. Or, you can be up to your eyeballs in debt and have a fabulous credit rating because you pay everyone on time. Many people with substantial assets but little credit payment history become very frustrated with this, but its just the name of the game. If you're financially independent and don't need to borrow money, keep a few credit cards open anyways. Swipe them, and pay them off in full when the statement comes. You won't pay interest for borrowing money, but you'll build credit just as well.
2. Rent, Utilities, Cell Phone Bills, Insurance, Etc. - while all of these items may be part of a "contract" whereby you agree to pay a company on a monthly basis, these items are never reported to the credit bureaus in a positive manner (on-time payments).
The best way to think about it is: "Am I borrowing money and then repaying it?", if not, it will likely not be reported to the credit bureaus.
Unfortunately, if you do not fulfill your contracts with these companies, it may often affect your credit negatively as they may report the account(s) as "collections".
3. Your Income, Job Title, Education, and Other Demographics. - While some limited employment information may be found on your credit reports, it in no way affects your credit rating. Neither does income or education.
While important aspects of your overall financial health, they mean little to creditors. Many low-income people manage money well, and many high-income people don't.
Your demographic information also pays no part in your
4. Bank Overdrafts and Negative Checking Accounts - temporarily over-drafting bank accounts will not be reported to the credit bureaus.
If you utilize an overdraft line-of-credit, this is a credit instrument and it may be reported to the credit bureaus.
Also, if you do not rectify your negative account, eventually the bank could send the balance to a collection agency which could affect your credit.
However, simply being charged overdraft fees or having a negative account balance will not affect your credit.
5. Using Credit Monitoring Tools - its important to understand the difference between a "soft inquiry" and a "hard inquiry" on your credit.
When you log onto Credit Karma, or stop into the credit union, to check your credit for monitoring purposes, this is a soft inquiry, which does not affect your score in any way. This applies to the credit monitoring services offered by credit card companies, as well.
Many "pre-approval" advertisements and services which can "pre-approve" or "pre-qualify" you for credit before you actually apply also use soft inquires. Keep in mind if you do move forward with the application you will get a hard inquiry on your credit.
Hard inquires aren't the end of the world, and they are necessary to get credit. You just don't want an excessive amount of hard inquires on your report, as they do lower your score for a time.
6. Government Assistance, Child Support, Alimony, Etc.
Receiving or paying these items will not affect your credit.
However, if you become delinquent in paying these items, you could be sent to collections or have a judgement placed against you by a court which would affect your credit.
Having trouble understanding your credit report or score? Towpath Credit Union offers free credit counseling to all of its members. Stop in or call us to make an appointment.
Director of Member Development, Everyday Finance Contributor