April 24th, 2012
3 More Things You Might Not Know About Credit Scores
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Thanks to the popularity of our post, “3 Things You Might Not Know About Credit Scores,” we’re once again clearing up some misunderstandings about credit scores. After all, that’s what we do best. Here are three more things you might not know about credit scores.
Not using your credit cards can be bad for your credit score.
If you have open credit card accounts but don’t use them, your credit could take a hit for two reasons:
- Some credit card issuers will mark credit cards “inactive” after a certain period of time. While they might not close the account, they may stop reporting it to the credit bureaus. This could shorten your age of accounts and increase your credit utilization rate, since the card’s credit limit will no longer appear as “available credit.”
- If you don’t use any of your credit cards, you’ll end up with a utilization rate of 0 percent, which will negatively affect your credit score. Never using your credit cards could reflect poorly on you because creditors want to see that you’re currently using the credit you have—and using it responsibly—in order to assess you as a good credit risk. If you don’t have any current activity, they won’t be able to accurately judge your creditworthiness. Keep in mind that you don’t have to carry a credit card balance from month to month to show credit card utilization.
Checking your own credit score won’t hurt you.
When you check your free credit score on Credit Karma it’s a self-initiated soft credit inquiry, which doesn’t damage your score like a hard credit inquiry does. However, be careful when doing any credit check; there’s a long list of the types of actions that result in a hard inquiry, which knocks a few points off your score. You can read more about hard and soft inquiries and see which actions will cause them in our article, “Hard Inquiries and Soft Inquiries.”
Your credit score helps determine your credit limit.
In a process called underwriting, credit card issuers use your reported income and your credit score to help set your credit limit. They take a look at your income to determine what credit limit is reasonable for your spending, and they look at your credit score to see how well you’ve paid back debts in the past. If you have a high income but a poor credit score, you’ll likely receive a lower credit limit. However, if you have a low income but a high credit score, you’ll probably be given a higher credit limit, because you’ve proven yourself to be responsible with the credit you currently have. In other words, while your income does come into play, your credit score is the bigger determinant of your credit limit. To help you better understand this concept, we made a video called, “How are credit limits determined?”
Have a Karmic Day!
Bethy Hardeman, Social Media Maven