Who doesn’t want a better credit score? Many consumers spend considerable time trying to gain precious points in the hope it will result in lower interest rates and better credit terms. However, there are many misconceptions about how your credit score is calculated and what actions will make an impact on your score.
“Your credit score is based on your contents of your credit report,” says Gail Cunningham, National Foundation for Credit Counseling vice president of membership and public relations. “Only financial information and activities, such as new credit cards opened, loans taken out, late payments and accounts closed are reported to credit bureaus, thus becoming part of your credit report.“
Here are five things that won’t increase your credit score.
1. Making more money
You may think your credit score will increase when you get a raise or that having a high salary has a positive impact on your score. But in fact, salary is not a factor at all in your credit score.
“The whole point of a credit score is how well you manage your credit,” says Cunningham. “People who make more money often spend more or manage their money very poorly.”
2. Certain credit report inquiries
When you apply for new financial services, the resulting “hard” inquiry is an indication that you may have taken on new debt that has not yet had time to be reported as an account, and a recent inquiry can cause a small decrease in your scores, says Maxine Sweet, vice president of public education at Experian.
“But, you can review your own report as many times as you want because it creates a ‘soft’ inquiry which can be only be viewed by you and is never scored,” Sweet says. “This is also true for inquiries for employment, insurance, account monitoring and preapproved offers.”
3. Closing unused or old credit card accounts
Closing old accounts is a strategy that many people use to try to increase their score. However, most of the time it actually has the opposite effect and can lower your score.
“Part of your credit score is how long you have had credit, so if you close one of your older accounts then your score will drop because you have a shorter length of credit,” says Anthony Sprauve, senior consumer credit specialist at FICO. “It also lowers your amount of credit available which lowers your credit-utilization percentage, thus potentially lowering your credit score.”
If you have cards you are not using that are free of fees, Sprauve suggests simply tucking them in a drawer and forgetting about them instead of closing the accounts.
4. Use of a prepaid card or debit card
While using debit cards and prepaid cards can be a good way to learn how to responsibly manage your money, your responsible use of these cards has absolutely no impact on your credit score.
“If you are trying to rebuild your credit and cannot get a traditional card, consider getting a secured card instead of using a debit or prepaid,” Cunningham says. “If your intent is to raise your score, be sure to ask your issuer if the secured card is reported to the credit bureaus.”
5. Opening a lot of different types of credit accounts
There is a misconception that to have a good credit score you need a variety of different types of credit, such as a line of credit, mortgage, car and credit card.
“In reality, you can have a great FICO score by having only one account and managing it responsibly,” Sprauve says. “The number and variety of accounts does not have an effect.”