Guess Which Aspect of Your Finances Does NOT Affect Your Credit Score?
When we look at credit reports, your credit history, and credit scoring, there are five (5) areas of how you pay your accounts, and the accounts you have that influence your credit score. However, oddly enough, one major are of your personal finances is not used, and does NOT affect your credit score.
Credit scores are composed of five things:
* How much you owe
* The types of accounts you have
* How long you have had credit
* How often you apply for credit
No where in these five factors used to create a credit score do we see earnings, income, how much you make, or even savings!
There also is nothing about your budget, and what your expenses may be each month.
Granted when a lender reviews your application for a loan there are two areas they will look at:
* Credit score
So at the time you apply for a loan the lender will review your income and expenses to check for affordability, but your income is not a part of your credit score.
Wages/Savings/Bank Accounts/How Often You Are Paid
When we look at credit reports and credit scoring, all of the above are not included or used in anyway to calculate your credit score.
How much you earn is not a factor in credit scoring, nor is how much you may have in the bank in savings.
How often you are paid has no influence or bearing on your credit score either.
You could have 3 current accounts, and 2 savings accounts, but unless there is a reported overdraft associated with the current accounts, none of these will factor into your credit score.
The overdraft(s) may be used in credit scoring, IF they are reported to the credit bureaus.
Only accounts that are reported to the credit bureaus are used in calculating a credit score.
So the richest person in the world could have a low or poor credit score, as credit scores are based on how you pay your accounts, and how much you owe, and the types of accounts you have.
Credit scores are not based on income or how much money you have.
Are Current Credit Scores Fit For Purpose?
This is a good question and one being debated as you read this.
There are those that feel credit scores and the current model for credit scoring is antiquated and in need of an update.
Social credit scoring is being used in China, and being looked at elsewhere in the world.
Lenders, banks, and others have access to a huge amount of data and information on us now, all of which can be used to give a better impression and model of who and what we are. Information hat can be used in many ways, and not just in granting loans.
In fact, data on and about us, is one of the most valuable commodities in the world today. So it is only a matter of time before all this information is sifted and sorted into some form of “score”, or given a numerical value that will not just be associated with us, but could define us.