It's no secret that to get a mortgage these days, you want to have good credit. However, there are a lot of misconceptions floating around out there about just what sort of things affect your credit score.

Some of them may seem counterintuitive, as they'd appear to have a bearing on your ability to pay your bills. Others seem to be misconceptions that grew out of things that actually can affect your score. Either way, they don't have an impact your credit score.

If you're trying to improve your credit score, the best thing to do is make sure to pay your credit card bills and other loan payments on time each month. But the following six items are things you don't have to worry about, as least as far as your credit score goes.

 

1 - Income

Surprised? Many people are, since how much you earn seems to have a direct impact on your ability to pay your bills. But your income has absolutely nothing to do with your credit score.

The ratings agencies that produce your credit score are more concerned with how you manage the money you do have than they are about how much money you have in total. Because people with high incomes and lots of financial assets can still live beyond their means, and can be some of the worst offenders on that score. So as long as you can manage your debt payments with the income you have, you're golden as far as your credit rating is concerned.

That's not to say income and assets are not factors in getting a loan. They are. But they're items a lender will consider in addition to your credit score, rather than being part of your credit score itself.

 

2- Employment

This is closely related to #1. What you do for a living has no bearing on your credit score. There are no occupations that are considered inherently more creditworthy than others. Doctors and lawyers have no advantage over short-order cooks when it comes to credit scores - because again, your credit rating doesn't depend on how you get your money, but how well you manage the money you have.

For that matter, even being unemployed doesn't directly affect your credit rating, although the resulting inability to pay your bills might. Many people who lost their jobs in the recession were still able to come through with their credit scores unblemished, provided they had enough resources to keep paying their bills until they found work again.

 

3- Marital status

Getting married won't change your credit score. On the other hand, being married can cause things to happen that will affect your score, especially if you're not careful.

Bottom line: You have a credit score. Your spouse has a credit score. Marrying someone with good credit doesn't improve your own score, nor does marrying someone with bad credit hurt it. However, your credit scores can interact in a variety of ways in a marriage, some of them beneficial, some of them not so much.

Your partner's credit score can affect your ability to get a loan, however, particularly if you're planning on applying jointly. In joint applications, lenders typically look at the lower of the two partner's credit scores when deciding whether to approve a loan. If that score is too low, the only way to get approved may be for the partner with good credit to apply as an individual. But in that case, they can't include their spouse's income as part of the loan application.

Getting married doesn't automatically merge your credit accounts. So if you maintain separate accounts, your spouse's credit behavior won't affect your credit rating. You can, however, add your spouse as a joint user on one or more of your accounts to help him or her build a good credit rating. If you do open joint accounts though (or apply for a mortgage or car loan together), the activity on those accounts will affect both of your credit scores.

 

4- Carrying a balance

You often hear that carrying a small balance on your credit cards from month to month will help you build your credit score. In truth, there's no harm in paying off your balance in full each month - and it will save you money as well.

What will prevent you from building credit, or at least cause your score to improve more slowly, is to have credit cards and never use them. So a modest level of activity is a good thing as far as your credit score is concerned.

What's more important than the mere fact you're carrying a balance on your credit cards, as far as the ratings agencies are concerned, is what's called credit utilization - how much of your available credit you're actually using. Generally, they like to see this below 30 percent on each card - so if you have $10,000 available, a balance of $3,000 would be 30 percent.

Finally, paying off your cards in full at the end of the month doesn't extinguish your credit utilization. If you use your credit cards a lot, you may run up large balances each month. That's fine if you can pay them off, but be aware that the amount on your statement each month is what counts as your utilization, even if you pay it off.

 

5 - Closing accounts

Financial advisors used to recommend that consumers with a large number of credit cards close out their excess accounts in order to improve their credit rating. At the time, the thinking was that a large number of cards represented a great deal of potential debt - and the risk that a borrower could run up an unmanageable level of debt if they suddenly started maxxing them out.

More recently though, credit ratings agencies have realized that sort of behavior is rare - that consumers who have managed their credit responsibly tend to continue to do so, regardless of how many credit cards they have. So they don't hold that against borrowers anymore.

In fact, closing out cards can actually hurt your credit score by increasing your relative credit utilization. So if you have $50,000 in credit available on 5 credit cards and close two of them so you have only $30,000 available, but have a total credit card debt of $10,000 on those cards, your total utilization would be 33 percent of $30,000, rather than 20 percent of $50,000.

 

6- Making multiple loan inquires

This one is actually half true. Credit rating agencies will diminish your credit if you show a pattern of applying for a large number of lines of credit over a short period of time - such as if you're filling out credit card applications at numerous stores while Christmas shopping or responding to every credit card offer that comes in the mail. That could be interpreted as a sign of a spending problem waiting to happen, or of someone who's having difficulty being approved and taking a shotgun approach in hopes one will come through.

On the other hand, it won't hurt you to make multiple inquiries into such things as a mortgage or auto loan. It's recognized that people shop around for these things and it's common for the lenders or dealers the contact to pull their credit report.

It's also accepted that people will sometimes request their own scores and reports when contemplating a major purchase. So in those circumstances, multiple inquires won't hurt you.

Published on March 17, 2010