You’ve paid your bills on time. You’ve avoided massive debt, or maybe you’ve paid it down. Now you have a healthy credit score to show for it.
But the coronavirus transformed the finances of tens of millions of Americans with little warning. So if you’re going through tough times right now, you’re probably wondering what that means for that score you worked so hard to build.
The good news is that what’s tough on your wallet isn’t always bad for that powerful three-digit number. Here are 10 financial setbacks that won’t affect your credit score.
What Hurts Your Credit Score? 10 Surprising Things That Don’t
For any piece of information to affect your credit score, it has to appear on your credit report. You’ll find lots of information on your credit reports, but the only five credit factors that determine your score are:
- Payment history, 35%: Whether you’ve made on-time payments.
- Credit utilization ratio, 30%: The percentage of revolving credit, i.e., what’s available to you through a credit card or line of credit, that you’re using.
- Age of credit, 15%: The average of your accounts and how long you’ve had your oldest account.
- Credit mix, 10%: Having multiple types of credit, e.g., both credit cards and loans, can help your score slightly.
- New credit, 10%: When you apply for credit, you get a hard inquiry on your report, which usually dings your score by a few points in the short term.
The following 10 situations may cause you financial pain in other ways, but they won’t impact your credit score. Of course, they could indirectly lower your score if you can’t pay bills or you increase your debt as a result.
1. Your Payments Are Paused Due to Coronavirus
If your credit card company or lender agreed to let you pause your payments because you were affected by coronavirus, they’re required under the CARES Act to report your account as current to the credit bureaus. Same goes for if you’re not making payments on your student loan that was automatically placed in forbearance.
The key here is that you need your lender’s permission before you’ve missed payments. Make sure you get confirmation from your creditor about how they plan to report your account status to the bureaus.
Also, ask creditors if they can stop interest from accruing while your payments are on hold. This isn’t just about saving money. If your balances increase because you’re still racking up interest, you risk increasing your credit utilization ratio, and that could hurt your score.
2. You Lost Your Job
You may see the names of your past or present employers if you listed them on a credit application. But the credit bureaus aren’t notified if you lose your job. FICO, the largest credit scoring firm in the U.S., also doesn’t use your job status to calculate your score.
Of course, if losing your job causes you to miss payments or increase your credit card balances, your score will drop.
Also, your credit score is just one factor that determines whether you’re approved for a credit card or loan. Pretty much any credit application will ask you about your job and income. Without steady income, you’re unlikely to get approved for new credit no matter how good your score is.
3. You’ve Blown Through Your Savings
The credit bureaus don’t know how much money you have in the bank. So if you have to spend your savings in an emergency or simply because you’ve blown your budget, your credit score won’t suffer.
However, having decent savings to put toward a down payment can help you get approved for a mortgage or car loan, especially when your score is lackluster.
4. You Were Late on Rent
Most landlords and apartment complexes don’t report rent payments to the credit bureaus. That means a late payment won’t hurt your score — and unfortunately, all those on-time payments you’ve made won’t help it, either.
But we want you to prioritize your rent and pay it on time if at all possible, even if you live in an area where a temporary eviction moratorium is in effect.
While those late payments probably won’t show up on your credit reports, many landlords report your payment history to tenant screening services. Frequent late payments will likely backfire, because many landlords consult those same services when deciding whether they’ll rent to you.
Of course, any bill, including unpaid rent, that’s sent to collections will cause your actual credit score to plummet.
5. You Were Late on Your Utility, Internet or Cell Phone Bills
If you’re late on these payments, you’ll rack up late fees, plus your service could be disconnected. But these payments also aren’t typically reported to the bureaus, so unless your bill is sent to collections, your credit score is probably safe.
6. You Took a 401(k) Loan
If you’ve exhausted other options for cash, you may be considering a 401(k) loan. Doing so doesn’t require a credit check because you’re borrowing from yourself, and the loan won’t appear on your credit reports.
While this move doesn’t hurt your credit score, it should only be considered as a last resort.
Not only are you jeopardizing your future retirement, but there’s a big risk if you leave your job for any reason with an outstanding loan. If you can’t pay it back in full with next year’s taxes, you’ll owe ordinary income taxes plus a 10% penalty.
7. You Overdrafted Your Bank Account
If you’re a frequent overdrafter, chances are you’ll rack up hefty fees. But your bank probably won’t report you to the credit bureaus.
Instead, they’ll relay that information to ChexSystems, which is like a credit report for your banking activity. Having a negative ChexSystems report won’t affect your credit score, but it could make it tough to open a bank account.
8. You Were Denied for Credit
When you apply for credit, you get a hard inquiry on your credit report, which usually causes your score to drop by a few points in the short term. But your credit reports don’t reflect whether you actually got the credit, so the effect is the same whether you were approved or denied.
Of course, if you need credit and get denied, you’re likely to apply again and again until you’re approved, and those multiple inquiries could hurt your score. One exception: If you apply for the same type of loan within 30 days, FICO assumes you’re rate shopping and treats all those hard pulls to your credit as a single inquiry.
9. You Got Behind on Taxes
The IRS has never directly furnished the credit bureaus with information about who’s behind on their taxes. But if you have significant unpaid IRS debt, you could wind up in a tax lien, which is public record.
In 2018, the three major credit bureaus agreed to remove tax liens from credit reports because they were resulting in a ton of errors, so now an unpaid tax bill won’t directly hurt your credit score.
But a tax lien is still public record. Having one will make it harder to qualify for a loan, particularly a mortgage, because lenders often search public records to see if you have outstanding liabilities that don’t show up on your credit report.
10. You Recently Racked up Medical Debt
Hospitals and doctor’s offices seldom report to the credit bureaus, so as long as you didn’t put your bill on a credit card, it’s unlikely to impact your credit score unless it’s been sent to collections.
But even if you have medical bills in collections, since 2017 the bureaus have required a 180-day waiting period before the debt will appear on your credit report. And even after that, if you or your insurance company pays the bill in full, the bureaus will completely remove the debt from your reports.
You can often negotiate medical bills and work out a payment plan with your provider, so it’s still best to act before the bill goes to collections.
Why You Need to Check Your Actual Credit Report
All three major credit bureaus — Equifax, Experian and TransUnion — are offering free weekly credit reports through April 2021. Usually, you’re limited to one free report from each bureau per year.
You won’t see your credit score when you check your report, but you’ll see the most up-to-date source of information that’s used to calculate your score.
If you’ve been given permission to miss payments for any account, monitor your credit reports to make sure it’s listed as current. Also look out for any accounts or hard inquiries you don’t recognize, or payments reported as late that you made on time.
By being vigilant and understanding what actually affects your score, you’ll position yourself to survive this downturn with your credit intact.
Robin Hartill is a certified financial planner and a senior editor at Codetic. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].