Your Credit Score: The Truth Behind the Number

What you don't know can hurt you. Here's how.

Imagine this: Two years ago, Emily moved into a new apartment downtown. A few days later, the cable company called saying that she’d never paid her last cable bill at her old place. Emily insisted that she had. After weeks of fighting with the cable company, she gave up. She thought, I don’t need to resolve the dispute, it’s not worth it.

Emily moved on. But when she recently looked into buying her first apartment, the incident came rushing back. That cable bill had been sent to collections and landed on her credit report as a delinquency. A delinquency will have a negative impact on your credit score.

While Emily’s story is fictional, the point of this story is very real: While many people understand what a credit score is and why it matters to lenders, most people are still susceptible to the vast amount of unclear credit score information that’s out there. To avoid frustrating (and financially damaging) situations in your future, let’s look at some common misconceptions and see what there is to learn about what affects your credit score.

Fiction No. 1: Only big debts can affect your credit score

Fact

Left unchallenged or unresolved, most negative information may stay on your credit report for up to seven years and impact your credit— even a small payment dispute. And unfortunately, a lower credit score usually means higher interest rates on big purchases, like a home.

The Good News

If an error appears on your credit report, you can contact the credit reporting agency and the company that provided the information to the agency to request that it be fixed. You should be sure to communicate any credit report errors in writing, so you have a record of correspondence in case questions come up later.

Fiction No. 2: The more money you make, the better your credit score

Fact

Income is not a factor in your credit score. In fact, in Emily’s scenario, the unpaid cable bill is likely to be more significant than any salary increase she may receive. That’s because a credit report focuses on your past payment history and current outstanding debts, not how much money you earn.

The Good News

Regardless of your income, one way you can maintain a good credit score is by managing your credit utilization ratio, which is how much of your available credit you are using on a credit card. Responsible credit utilization is important – the general rule of thumb is to keep that ratio low and not maintain a balance over 30 percent of your credit limit on any card. 

Fiction No.3: Your credit score is a static number

Fact

Actually, you can simultaneously have several different credit scores, and your credit score can change frequently. Each credit reporting agency has its own list of credit factors and its own formula for calculating scores. In Emily’s story, the number didn’t only change when the delinquency hit her credit report. In the years following, her score would also fluctuate based on her growing credit history, payment history, and delinquencies (or lack thereof).

The Good News

The law requires each of the credit reporting agencies to provide you with a free copy of your credit report each year if you request it. And despite common belief, you can check your credit report without lowering your score.

Fiction No. 4: Checking loan rates with a lender or looking at your credit report will hurt your credit score

Fact

There are two types of inquiries into your credit report, a hard inquiry and a soft inquiry. A hard inquiry occurs when a lender checks your credit because you submit an application for a loan or credit card. This type of inquiry appears on your credit report and can affect your credit score. When you check your own credit report or loan rates on a lender’s site it’s called a soft inquiry. Soft inquiries do not appear on your credit report and do not impact your credit score.

The Good News

Not all hard inquiries are created equal. Most credit scores are not affected by multiple inquiries from auto or mortgage companies. The credit reporting agencies typically see these inquiries as single events – they understand consumers may be shopping for a home loan or a new car. However, applying for several credit cards in a short period of time will appear on your credit report as multiple inquiries and could affect your credit score

The more you know about the factors that can affect your credit score, the better decisions you can make to keep your finances – and your credit history – on track.

Fiction No. 5: Only active or current debts affect your credit score

Fact

As Emily experienced, your credit report contains negative information about your credit and payment history for both open and closed accounts – as far back as 10 years.

The Good News

Positive information about active and open accounts in good standing can stay on your credit report – and positively influence your credit scores forever. Unfortunately, negative information for both open and closed accounts can stay on your credit report and affect your overall credit score for seven years (and 10 years for bankruptcies). It’s a good idea to check your credit reports to ensure that negative information has been removed within the appropriate time period – and ask for a correction if you discover that it hasn’t.  

Fiction No. 6: Simply speaking to a credit counselor can negatively affect your credit score

Fact

Speaking with, and getting advice from, a credit counselor does not impact your credit score.

The Good News

A credit counselor can help you learn about budgeting and managing your finances, including advice for getting control of your debt and responsibly using credit cards. Participation in classes or counseling sessions will not affect your credit report. If your credit counseling leads to a debt being repaid through a debt management plan, with the credit counseling agency negotiating lower interest rates or reduced payments, that information could indeed be included on your credit report, where lenders will see it. Be aware, however, if the lender treats the debt as settled instead of paid in full, your credit score can be negatively affected. But the good news is getting advice and simple counseling can help you improve your financial situation without affecting your credit scores.

Fiction No. 7: Your marital status, race or age can affect your credit score

Fact

The most widely used credit score, the FICO score, does not consider certain personal information in creating your credit score.  This includes but is not limited to your race, color, religion, national origin, sex, marital status, age and where you live.                    

The Good News

U.S. law prohibits credit discrimination based on race, religion, national origin, age, sex, marital status or whether one receives public assistance. Remember, your credit score is intended to be a predictor of creditworthiness and financial health – not a commentary on your life or identity.

Learn more about Marcus

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.