What Affects Your Credit Score

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What Affects Your Credit Score

Your credit report shows potential lenders, renters, and employers how you manage credit. Your credit report includes information such as the creditor’s name, payment history, account balance, and, in the case of credit cards and other revolving debt, what percentage of your available credit you have used for each mortgage, auto loan, personal loan, or credit card you have had.

Credit reporting firms, also known as credit bureaus, use this information to feed proprietary algorithms that give you a numerical number known as your credit score. If you do not pay your creditors, pay them late, or have a habit of maxing out your credit cards, that information appears on your credit report, which may reduce your credit score and prohibit you from acquiring further credit, an apartment, or even a job.

Checking Accounts and Credit Scores

While your checking account is a crucial element of your financial life, it has only a little impact on your credit score in some circumstances. Normal day-to-day checking account activity, such as deposits, checks, withdrawals, and transfers to other accounts, does not show on your credit report. Your credit report only includes information about money you owe or have owing. However, there are a few exceptional cases when your checking account might have an impact on your credit score.

Key Takeaways

  • Credit scores are used to assess the creditworthiness of a borrower.
  • Normal checking account activity, such as deposits and withdrawals, is not recorded to credit agencies.
  • Total debt, repayment history, and credit use are all elements that influence credit ratings.
  • If the information on a credit report is incorrect, people may try to correct the mistakes by filing a dispute with the credit agencies.

When you apply for a checking account, the bank may do a credit check. In most cases, it just does a soft inquiry, which has no influence on your credit score. On rare occasions, a hard inquiry is utilized; although this might lower your score, it is generally by little more than five points.

If you sign up for overdraft protection on your checking account, your credit report may be alerted. While banks typically portray overdraft protection as a benefit or a favor to their consumers, it is essentially a line of credit. As a result, it may result in a hard inquiry and will be reported on your credit report as a revolving account. Every bank is different in this aspect, so when you sign up for overdraft protection, make sure you understand if and how your bank will report it to credit agencies.

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Overdrawing your checking account without overdraft protection or signing a bad check may damage your credit score, but not immediately. Such difficulties are not recorded since your checking account is not mentioned on your credit report. If you overdraw your account and then fail to refill it and/or pay the overdraft penalties, your bank may turn the money you owe over to a collection agency, the majority of which report to credit agencies.

Maintaining constant oversight of your account guarantees that you are constantly aware of your balance and can immediately discover any problems that may result in an overdraft.

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3 Important Credit Score Factors

Late Payments and Credit Scores

Most credit card issuers levy late fees if a credit card account goes delinquent: $25 for sometimes late accounts, up to $35 for consistently late accounts. A slew of late fines will have a negative influence on your credit score. When a debtor fails to pay an account for three to six months in a run, the creditor will usually charge off the account. The charge off appears on the consumer’s credit record and lowers the credit score.

If you need assistance repairing the harm that late payments have done to your credit report, one of the top credit repair businesses may be worth investigating.

Credit Utilization Ratio

Your credit usage ratio, often known as your credit utilization rate, compares how much you are borrowing to how much you could borrow given your current credit limitations. Utilization ratios are used to establish credit ratings and are often utilized by lenders to assess your capacity to repay a possible loan. In fact, your credit usage ratio accounts for around 30% of your entire credit score. 1 The most basic and true approach to think about your credit usage ratio is as follows: the smaller the percentage, the better your credit score.

There are no definitive answers as to what your rate should be. Most financial experts advocate a credit usage percentage of less than 30-40%, with others recommending rates as low as 10% for individual accounts. High usage rates are a major sign of credit risk, and when your ratio approaches and reaches 40%, your credit score suffers.

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You may lower your usage ratio in two ways: by obtaining more credit overall, either via new accounts or raising the credit limit on current accounts (thereby increasing the denominator used to compute the ratio), or by paying off existing obligations (decreasing the numerator).

Keep in mind that creating another credit account results in a credit inquiry, which lowers your credit score (temporarily).A credit limit increase on an existing account is typically a win-win situation—as long as you don’t spend the extra money right away!

Some lenders may automatically extend your credit limit if you demonstrate that you are a responsible (and lucrative) borrower, but in many cases, you must request an increase. Timing is essential. For example, if you have extra spare income due to a pay rise or lower costs, provide evidence of this to your lender to improve your prospects.

Having other accounts with the lender might also be advantageous. Banks and other financial organizations are more receptive to credit expansion requests from repeat clients. Calculating how much of a raise you want ahead of time might make you seem more prepared and responsible.

When it comes to paying off debts, time is crucial. Even if no payments have been missed, your usage rate may be greater than your current account balances indicate if the issuer sends the amount to credit reporting bureaus before you complete your payment.

Fixing Credit Report Errors

Under the jurisdiction of the Federal Trade Commission, the three main credit bureaus monitor credit records. These agencies might disclose misleading information as a consequence of a clerical mistake, incorrect information from credit lenders, or even fraud. If you discover an inaccuracy on your credit report, there are a few basic but critical things you may do.

Consumers have the right, under the Fair Credit Reporting Act, to contest any inaccurate statements with each bureau. The initial step is to get in touch with one or more credit reporting agencies. A letter is one method, but a dispute may also be made on the websites of each of the credit bureaus. 2

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Many example dispute letters are available online, and they offer a basic framework for rectifying credit reporting problems. In addition to essential information such as your name, address, and other contact information, you should give a detailed explanation of each inaccuracy you want to challenge. The finest disagreement letters are straightforward and succinct, using factual language that can be supported by proof. Include copies of bank statements, invoices, financial notifications, and any other documents that demonstrate the mismatch between the report’s inaccuracy and what really transpired.

If the inaccuracy on the credit report is the product of fraud, more procedures must be performed. According to the Bureau of Justice Statistics, existing credit or account information is used in 85% of identity theft instances. 3 Credit experts advise that you review your credit report on a frequent basis so that any fraudulent problems may be remedied as soon as feasible. If you want further assistance in this quest, check into one of the top credit monitoring services.

While all three credit bureaus are legally obligated to examine inaccuracies within 30 days of their discovery, the longer an error remains unnoticed, the more difficult it is to detect suspected fraud. Before making adjustments to a credit report, credit bureaus submit copies of supporting documentation to reporting lenders and other organizations, even if an inquiry has already started. This procedure may be time-consuming, thus timely reporting is advised.

Once a credit agency inaccuracy has been protested and an inquiry has commenced, the dispute is either accepted or denied. If the dispute is accepted, the inaccuracy on the credit report is normally deleted, and any negative effect on the credit score is reversed. Even if a disagreement is not accepted, you may request that documentation of the dispute be included in the file. A firm or person who inquires about your credit report will be able to see that the inaccuracy was contested. For added convenience, some agencies charge a modest fee to send a copy of the dispute to all recent enquiries.

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