It is often assumed that rich people have very high credit scores. The reality is that many different factors are considered in a credit score, but the amount of money a person has is not on that list.
The Factors That Do Not Count
Assets, marital status and income are not part of a credit score. A person's race, sexual orientation, gender, nationality, religion or political leanings also do not contribute to the score.
Employment status and occupation are not factored into a credit score. This often causes confusion because an employer can appear on a credit report. Mortgage lenders and others typically require that a person have job stability in order to qualify for a loan. This means employment is a consideration for lending eligibility, but it does not affect a credit score.
Age does not matter although older people tend to have longer histories regarding credit, and this does play a role in determining a score.
Those who are paying alimony and child support will not be affected unless they get behind on payments. Collection actions and judgements will cause a score to decrease, which can bring negative consequences.
Employer credit checks and pre-approved offers of credit are considered to be light inquiries that have no affect on a credit score.
The Factors That Might Count
Monthly rent payments along with utility and cell phone bills do not factor into a score unless the accounts enter default and are reported to credit bureaus. This situation is slowly changing due to a new alternative credit score.
The new score was designed for people who do not otherwise qualify to be traditionally scored. The requirements for a traditional score require one account that is at least six-months-old, one account that is reported to a bureau and an account holder who is alive.
This alternative score takes utility payments, rent and address history into consideration. When FICO enabled the new model earlier in 2015, about 15 million previously ineligible people received a credit score, with 33 percent of that group earning a score above 620, which is the minimal approval level for most lenders. When someone in this group eventually qualifies for a traditional score, that system will be used instead.
For renters, the alternative score does use data from reported rent payments. This can give a big boost to a credit score if the rent is always paid on time.
The Factors That Do Count
A FICO score is dependent on a small number of factors that are based on certain behaviors.
- History of payments
- Making up 35 percent of a credit score, this is the most important aspect. Those who pay their monthly bills on time will get full credit regardless of the balance being carried
- Utilization of debt. This is the ratio of debt being carried against the amount of credit available. A low number will have a positive impact on a credit score. Debt utilization is sensitive, and having even one card at its limit can have a negative impact on a credit score. This factor accounts for 30 percent of the total score
- Credit history length. Accounts that have been open for a long period of time indicate a person who is experienced with using credit. This means the higher the average account age is, the higher the credit score will be. When cards are paid off, the accounts should be left open and allowed to age, even if they are never used again. Closed accounts play a role as well, but they eventually age off a credit report. Credit history length is 15 percent of the score
- New accounts and inquiries. Applications for a new credit line and requests to increase a current one contribute 10 percent to the score. These actions are considered to be hard inquiries, which lower the score somewhat each time they occur. While the overall effect on a score is minor, it can be a larger issue for those who are on the border between good and fair. Applications for credit may be denied if there are too many inquiries in a short time period. This does not apply to periodically checking a credit score.
- Mix of credit. This factor is the different types of credit a person has in their file. Many creditors like to see that mixed credit types are being handled responsibly such as car and house payments, student loans and credit cards. Mix of credit accounts for 10 percent of a credit score.
The Effect of Money on Credit
While money does not directly affect a credit score, it can have an influence on how a person manages credit accounts.
High debt utilization can cause a negative impact on a score. This is usually due to lack of financial resources, which lead to an inability to pay off debt. Another example is having a dire financial emergency that requires credit cards to be used up to their limit.
Not having a steady flow of cash can leave a person unable to make timely payments. Late payments always cause a negative hit to a credit score. T
hose who have access to ample supplies of cash may only rarely use credit or simply never apply for it at all. Someone who uses cash for all transactions will have no credit data and therefore no credit history.
While it may seem like there is a relationship between being rich and having an excellent credit score, wealth does not factor into it at all. Credit scores are based more on responsibility and commitment than money.
