Figuring out what impacts your credit score and why it moves up and down can be confusing, but it’s an important concept to understand. If you’re a software engineer new to Silicon Valley or new to the country and you’re thinking of purchasing Silicon Valley real estate in the near future, you need to know how your credit score will affect that transaction. A lower credit score can saddle you with a higher interest rate from your mortgage lender and force you to pay tens of thousands of dollars more in interest charges over the life of the mortgage.
As I’ve discussed this month, there are strategies to establish a credit history
and also to repair your credit score
if it has taken a hit. People wonder if not using a credit card at all is a good way to improve their score because there’s no way they’ll fall behind on payments or accumulate a crushing debt load.
Use Your Credit Card Responsibly to Prove You Can
But inactivity is NOT the answer to improving your score, and inactive cards actually can bring down your credit score. Leslie McFadden at Bankrate.com talks about credit card utilization
and how it measures your debt-to-credit limit ratio. The lower your ratio, the higher your score. But you need to show that you’re actively keeping your ratio low by using your credit card and paying off balances in full; there’s no way to accurately gauge your ability to use credit responsibly if you don’t actually use your credit card.
As McFadden notes, “Utilization contributes toward the amounts-owed portion of your FICO score, a scoring model commonly used by lenders. The amounts-owed factor counts for 30 percent of your score.” So as you settle into Silicon Valley and an American-style life, be aware that using credit intelligently will benefit your credit score in the long run.
The Effect of Inactivity
So what happens if your credit cards are inactive? Jim Wang at U.S. News & World Report
says the research isn’t crystal clear at this point and more research is necessary. But just as we know that canceling a credit card (especially one that you have held for a long time) can hurt your credit score, there are some indications that simply not using a credit card also can negatively impact your score. It’s not necessarily a direct correlation, but some credit card companies will cancel your credit card if they deem it inactive because they’re not making money off you in the form of interest payments or interchange fees they charge merchants when you use your card. And a credit card cancelled by the company and not by you could be a significant black mark against you.
As a software engineer new to the country and establishing your life in Silicon Valley, remember you can turn to KeyPoint Credit Union for credit cards
that offer low rates and valuable features.