3 Things That Lower Your Credit Score and 3 That Don't
There are a lot of myths about what does and doesn't affect your credit score. It's true that failing to make payments on your debts or going through bankruptcy will make your credit score drop like a rock, but these aren't the only things that can damage your score in a big way. On the other hand, some things that you'd think would have a major negative impact on your score have no effect whatsoever.
Large impact: Not paying your taxes
If you fail to pay your taxes on time, the government may file a tax lien against you, which can sink your score. Thanks to the change in credit reporting guidelines made in July 2017, the three major credit bureaus have set higher standards for listing tax liens on credit reports (the lien must now include your name, address, and either your Social Security number or your date of birth to appear on your report). But if the tax lien does meet the more stringent reporting standards, it can have a huge impact on your credit, potentially dropping your score by as much as 100 points. And it's not just your federal income taxes that you need to worry about. If you fail to pay your state taxes or property taxes, your local revenue department might drop the tax lien hammer on you as well.
Paying off the lien will help, but it won't immediately raise your credit score. Paid liens will stay on your report for up to seven years; unpaid liens stick around for as long as 10 years. However, you can request a withdrawal of the lien, which would get it off your credit report and bounce your score back up. To request a withdrawal of a federal tax lien, fill out Form 12277 and send it in to the IRS.
Medium impact: Skipping bill payments
Lenders aren't the only ones who will tattle to the credit bureaus if you fail to pay them. Utility companies, landlords, healthcare providers, and anyone else who's ever sent you a bill might send you to collections, which means the collections agency will report you to the credit bureaus. Even something like unpaid parking tickets or a large library fine could end up in collections.
The impact of a collection action on your credit score varies based on the amount of the collections claim, how recent it is, and your current credit score (the higher the score, the bigger the hit you'll take). Some credit scoring models ignore collections of less than $100, and they may assign different point losses to medical debt. All in all, it's hard to predict how a given collections action will affect your credit score -- but it will probably be significant.
Small impact: Requesting a higher credit limit
Believe it or not, asking your credit card provider to raise your credit limit can ding your credit score. That's because before approving or declining a credit limit increase, most lenders will pull your credit report. This counts as a "hard" inquiry, and thus it will temporarily lower your score. Applying for insurance, signing up for a new cellphone plan, or even getting a new job can also trigger a hard inquiry.
For most people, hard inquiries have a minimal effect on credit scores (around five points on average), and the effect dissipates quickly. That means the only time you need to worry about the effects of a credit check is when you're about to apply for a mortgage or other major credit product, because keeping your score as high as possible could get you a better interest rate on such a loan.
No impact: Having a criminal record
If you get in trouble with the law or even go to jail, it will have no effect on your credit score. In fact, it won't appear on your credit report at all. However, civil judgements do show up on your credit report. So if you run over someone with your car and are convicted of manslaughter, this won't affect your credit -- but if the victim's family sues you for damages, it will have an impact on your score.
No impact: Losing your job
Being fired or laid off from work won't affect your credit score, whatever the reason for your departure. Neither your employment status nor your income appears anywhere on your credit report, although if you apply for credit, the lender will probably take those factors into consideration. As far as the credit bureaus are concerned, income doesn't relate to creditworthiness, because the way you spend your money is more important than the amount of money you have coming in.
No impact: Working with a credit counselor
Finally, if you hire a credit counselor and sign up for a debt management plan, a note about this will appear on your credit report -- but it will have no impact on your credit score. The FICO scoring model has ignored debt management plans since 1999. In fact, a debt management plan may even help your credit score by improving your payment history and reducing your credit card utilization. However, it's a good idea to keep an eye on your credit report to confirm that the credit counseling company is paying your bills on time. If they fail to do so, the resulting late payments would indeed cause your credit score to drop, which would rather defeat the purpose of getting credit counseling.
While it helps to know what specific actions can and cannot change your credit score, you've likely noticed a trend here: If you're responsible with money and debt, then you have very little to worry about. Pay all your debts on time and in full, and there's a good chance your credit score will go nowhere but up.
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