What Affects Your Credit Score

Your credit report provides a snapshot for prospective lenders, landlords, and employers of how you handle credit. For any mortgage, car loan, personal loan, or credit card you have had, your credit report lists such details as the creditor’s name, your payment history, account balance, and, in the case of credit cards and other revolving debt, what percentage of your available credit that you have used.

Credit reporting agencies, colloquially known as credit bureaus, also take this information and plug it into proprietary algorithms that assign you a numerical score, known as your credit score. If you do not pay your creditors, pay them late, or have a tendency to max out your credit cards, that kind of negative information is visible on your credit report, which can lower your credit score and may prevent you from receiving additional credit, an apartment, or even a job.

Checking Accounts and Credit Scores

While your checking account is an important part of your financial life, it has little effect on your credit score, and only in certain situations.

Normal day-to-day use of your checking account, such as making deposits, writing checks, withdrawing funds, or transferring money to other accounts, does not appear on your credit report. Your credit report only deals with money you owe or have owed. However, a few isolated circumstances exist where your checking account can affect your credit score.

When you apply for a checking account, the bank might look at your credit report. Typically, it only makes a soft inquiry, which has no effect on your credit score. On occasion, however, a hard inquiry is used; while this can negatively affect your score, it is usually by no more than five points.

Your credit report might be triggered if you sign up for overdraft protection on your checking account. While banks frequently advertise this service as a perk or a favor to its customers, overdraft protection is actually a line of credit. As such, it can trigger a hard inquiry and also ends up listed on your credit report as a revolving account. Every bank is different in this regard, so before signing up for overdraft protection, make sure you understand if and how your bank reports it to the credit bureaus.

Overdrawing your checking account without overdraft protection or writing a bad check can end up on your credit report, but not right away. Because your checking account itself is not listed on your credit report, such issues do not get reported. However, if you overdraw your account and then fail to replenish it and/or pay the overdraft fees, your bank may turn the money you owe over to a collection agency, most of which do report to the credit bureaus.

Keeping close tabs on your account at all times ensures that you always know your balance and can quickly identify any errors that may trigger an overdraft.

Late Payments and Credit Scores

If a credit card account becomes delinquent, most credit card companies charge late fees: generally $25 for occasionally late accounts, up to $35 for habitually late accounts. A plethora of late fees will negatively impact the credit score. After a debtor has failed to pay an account for three to six months in a row, the creditor typically charges off the account. The charge off is noted on the consumer’s credit report, and it will also lower the credit score.

If you need help to undo the damage done to your credit report by late payments, one of the best credit repair companies might be worth considering.

Credit Utilization Ratio

Your credit utilization ratio or credit utilization rate measures how much you are borrowing relative to how much you could borrow, given your existing credit limits. Utilization ratios are used to calculate credit scores, and lenders often rely on them in evaluating your ability to repay a potential loan. In fact, roughly 30% of your overall credit score is determined by your credit utilization ratio. The simplest and most accurate way to think about your credit utilization ratio is this: the lower the ratio, the higher your credit score.

There are no precise answers regarding what your rate should be. Most financial experts recommend a credit utilization rate below 30-40%, and some say that individual accounts should have rates as low as 10%. High utilization rates are a big indicator of credit risk, and your credit score becomes adversely impacted as your ratio approaches and exceeds 40%.

You can reduce your utilization ratio in one of two ways: gaining more credit overall, through new accounts or increasing the credit limit on current accounts (thus, increasing the denominator to calculate the ratio), or paying off existing balances (decreasing the numerator).

Keep in mind that opening another credit account leads to a credit inquiry, which negatively impacts your credit score (temporarily). A credit limit increase on an existing account is usually a win-win—as long as you don’t immediately spend the additional funds!

Some lenders automatically provide a credit limit increase if you prove to be a responsible (and profitable) borrower, but in many circumstances, you have to ask for an increase. Timing can be important. For example, if you find yourself with more disposable income, either through a pay raise or reduced expenses, then provide proof of this to your lender to help your chances.

Having additional accounts open with the lender can also be a plus. Banks and other financial institutions are more sympathetic to credit increase requests from loyal customers. Calculating in advance how much of an increase you are seeking can make you seem more prepared and responsible as well.

When it comes to paying down balances, timing also matters. If the issuer reports the balance to credit reporting agencies before you make your payment, even if no payments have been missed, your utilization rate could actually be higher than your current account balances reflect.

Fixing Credit Report Errors

Credit reports are monitored by the three major credit bureaus under the authority of the Federal Trade Commission. Sometimes these bureaus report false information as a result of a clerical error, erroneous information from credit lenders, or even fraud. If there is an error on your credit report, there are several simple yet important steps you can take.

Under the Fair Credit Reporting Act, consumers have the right to dispute any false claims with each bureau. The first step is to contact one or more credit reporting companies. One way to do this is by drafting a letter, but a dispute can also be filed on the websites of each of the credit bureaus.

Many sample dispute letters can be found online and provide a basic outline for resolving credit reporting errors. In addition to basic information, such as your name, address, and other contact information, you should also include an itemized discussion of each error you would like to dispute. The best dispute letters are clear and concise, sticking to factual terms that can be verified with documentation. Attach copies of bank statements, bills, financial notices, and any documents that show the discrepancy between the error on the report and what actually occurred.

In the event that the error on the credit report is the result of fraud, additional steps need to be taken. The Bureau of Justice Statistics estimates that 85% of identity theft cases result from existing credit or account information. Experts recommend regularly monitoring your credit report so that any fraudulent errors can be addressed as quickly as possible. If you need any additional help in this endeavor, consider looking into one of the best credit monitoring services.

While all three credit bureaus are legally required to investigate errors within 30 days, the longer an error goes unreported, the more difficult it becomes to identify potential fraud. Even once an investigation has begun, credit bureaus first send copies of supporting documents to reporting lenders and other agencies before making changes to a credit report. This process can be lengthy, so quick reporting is recommended.

Once an error has been disputed with the credit bureaus and an investigation has begun, the dispute is either accepted or rejected. If the dispute is accepted, the error is generally removed from the credit report, and any negative impact on the credit score is reversed. In cases where a dispute is not accepted, you can still ask to have documentation of the dispute included in the file. This way, a company or an individual who makes an inquiry about your credit report can see that the error was disputed. Some bureaus charge a small fee to send a copy of the dispute to all recent inquiries for additional convenience.