3 Things Not Counted in Your Credit Score

By Nathan Hamilton Markets Fool.com

No doubt there's a wealth of credit score information on the internet. But along with handy tips to improve the most popular credit score -- the FICO score -- there's an abundance of misinformation that leads people astray.

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In the video below, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss three things that are not counted in your FICO score, and they help you to focus on what matters. Follow their advice, and you could join an elite club: the 11% of Americans who have a credit score over 800.

Increasing your credit score brings with it a number of perks, including access to lucrative credit card sign-up bonuses.Tune in to the video below to learn more.

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Michael Douglass:So the internet. Definitely a thing.

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Nathan Hamilton:A lot of information out there.

Douglass:A lot of information and, unfortunately, as I think we've all discovered, a lot of misinformation out there, and that is definitely very true in credit scores. People think that these things are shrouded in mystery. That certain things apply that don't actually, so let's go ahead and clear up a few things that are not part of your FICO credit score so you don't need to worry about it from a credit-score perspective. For example, not all inquiries are counted and impact your FICO score.

Hamilton:And essentially, what you want to be looking for is, when you're going through a credit decision, either for a loan or a credit card, make sure to review and see if it says "soft" inquiry versus "hard" inquiry. A soft inquiry is for a credit card preapproval, or if you're getting prequalified for a mortgage -- not preapproved for a mortgage -- but prequalified for a mortgage. There will be a soft inquiry on your credit history.

And why that matters is, your FICO score, which is the standard credit score that many banks and lenders use to make lending decisions, is impacted by the inquiries that are made on your credit score. Hard inquiries.

So it's definitely important to pay attention. You mentioned "shrouded in mystery." Not everything is shrouded in mystery, but certain points movements are a little bit mysterious, and what could happen is, you may have anywhere from a 5 to 10 point decrease in your credit score based upon a number of inquiries.

Douglass:That makes sense. If you have a lot of inquiries, there are some questions that come as a result of it, but it's not a big difference.

Hamilton:No.

Douglass:So there are also a number of things that aren't in your credit report, and therefore do not affect your credit score. Your salary, race, gender, marital status. These things just do not directly affect your credit score.

Hamilton:The FICO score model's intent is to assess credit risk, and that's regardless of your race, sex, gender, marital status. It relies upon information that's reported to the three credit bureaus, and that's not going to include your race, genetics, anything like that. They're going to be looking at your credit limits, your credit spending habits, your payment habits. How you manage debt -- all of that inferred from the information provided to the three credit bureaus.

Douglass:And credit-counseling services also not included.

Hamilton:Yes, and that's the third one. If you look at it, the preceding things that may affect your credit score -- if you go through a bankruptcy, that's going to affect your FICO score. But credit-counseling services that you may take advantage of after that fact aren't going to affect your FICO score because, essentially, if you think about it, it is a good move by you to improve your finances, and that should be reflected in your FICO score. You definitely shouldn't be dinged, which is what the model accounts for.

Douglass:Absolutely. That makes sense. And the fact of the matter is, with the internet being what it is, there is a lot of misinformation out there, and so it's important to have a good resource. And fortunately we've got one. It's fool.com/credit-cards. There we've got a lot of information about credit, about debt, about managing debt, budgeting, and credit cards.

Hamilton:And more credit score stuff.

Douglass:Right, absolutely. We've got free copies of our credit card guide, and we also have our picks for the best credit cards of 2017, which should be useful to a lot of different people. So we'll hope to see you there. Nathan, thanks much.

Hamilton:Thank you.

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