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There seems to be a lot of misleading information surrounding credit scores and credit reports lately.
A lot of what you may believe as true might very well be credit score myths instead.
In this post, I aim to debunk many of these myths so that you can be on your way to improving your finances and living a much simpler life
First, let’s talk about credit scores.
Your credit score is a 3-digit number that is meticulously calculated by thousands of bureaus in many different ways. The number is then used by lenders to determine how much of a risk you might be when lending money to you.
The most common number used by lenders is the FICO score. The higher your number, the less of a risk you are with 850 being the highest you could have.
Here’s how your FICO credit score is calculated:
- Payment History: 35% of your score is weighted in this category. Your on-time payments have the biggest weight in your score.
- Debt Utilization: 30% of your score is weighted in this category. How much of your debt are you using? Typically, you would want to keep this under thirty percent.
- Length of Credit History: 15% of your score is weighted in this category. The longer you have had an open credit line with on time payments, the better.
- New Credit: 10% of your score is weighted in this category. Opening new lines of credit may have an impact on your score.
- Credit Mix: 10% of your score is weighted in this category. Installment loans, revolving credit, mortgages, credit cards, and store cards are all examples of different types of credit.
Now that you have a general sense of what a credit score is, how it is used, and how it is calculated, let’s get into debunking these credit score myths.
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Credit Score Myths You Need to Know are FALSE
1. Checking your own credit report or score will hurt you
This is totally false. The media is finally catching on and showing this misconception in some T.V. commercials.
It’s actually best practice to check your score regularly.
- Mistakes will be made and you will have the ability to catch them before it gets our of hand.
- You have more power in managing your finances when you have a full picture of what, when, and how much credit or debt you have.
I check mine every 3 months. I’m considering checking it every month as identity theft, data breaches, and privacy breaches are becoming more common.
There are many places where you can check your credit score for free. Check your credit score will all 3 major bureaus to get a full picture.
My favorite places to get your free credit score are:
2. You have only one credit score
False. You have many credit scores. The main ones that lenders look at may include FICO, Experian, Transunion, and Equifax. These scores can be different at any given time.
3. Better job= Better credit score
I honestly don’t know how people believe this but just because you work on Wall St. doesn’t mean you have a better score than the garbage man. Bigger degree and higher paying job does not equate to a better credit score.
4. When you get married, you will combine your score into one
This is a credit score myth. Even when you marry, you still have your own score.
However, if you have a mortgage with both of your names on the deed, a late payment affects both scores.
5. You need to carry a balance each month to help your score
Please, please, please stop believing this. You do not need to carry a balance to increase your score.
Lenders like to see that you are responsible with your money. Paying on time and paying on time with a balance is the exact same weight. So please save yourself the interest and pay that sucker off in full every month.
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6. A bad score lasts forever
I guess this depends on what your definition of forever means. 7-10 years might seem like forever but it’s not.
Depending on the type of bad credit you have, you can start to rebuild your score with on time payments and decreasing your debt utilization.
7. Debit and prepaid cards will help you build a good credit score
Debit and prepaid cards have no liability attached to them. If you really want to start building your credit fast, then apply for a secured credit card.
With a secured card, you place a deposit that will become your limit. You can then use your card and pay it back.
8. Paying off a collection keeps it from hurting your score
False. Just because you pay off your collection account, doesn’t mean that it will be removed or erased from your credit report. Your debt will be gone, which is a good thing, but the effect it has on your score will not be.
Eventually, over time, the weight that a collection has on your score will matter less and less. An old collection of 5 years has less of an impact on your score than a month old collection.
You can always dispute the collection. To dispute a collection, make sure that you get it in writing and it specifically says that it will be removed from your report. *this will not always work in your favor and no one is obligated to remove anything from your report once it has already been submitted* but it’s worth a shot.
9. It will take 7 years to improve a bad score
While negative reports like collections and bankruptcy can stay on your report for 7+ years, it doesn’t mean that your score will be unsalvageable for 7+ years.
As stated above, the length of the negative report will matter less and less as time goes on. However, if the collection agency reports it as a new debt (this can happen when you don’t pay), then the negative inquiry becomes new again. When this happens, it drops your score.
But if the collection is paid, time will allow your score to improve as long as you make on time payments from now on and don’t use more than 30% of your debt.
10. You need to accumulate debt to build a good score
You do not need to go into debt to build a good credit score.
New FICO scores will factor in utilities only if your utility company reports it. As long as you are paying your bill in full on time, then you will build your credit.
However, utility companies ARE NOT obligated to report to credit bureaus and they probably won’t unless you make a late payment. Using this strategy for building good credit is not reliable so it is best to open up a secured card.
If you decide to open a credit card, make sure that you will be able to pay it in full each and every month.
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11. Your debt to income ratio affects your credit score
This is false. Your credit score does not take your income into account. Your credit report does not show your income. Therefore, it is impossible to see your debt to income ratio on either of these reports.
Your debt to income ratio is important when applying for new loans or lines of credit which is why you will need to provide your income information. They don’t see it.
12. One late payment won’t hurt your credit score that much
While you may think that one late payment won’t hurt, you might be in for a little surprise when you see a drop in 30 points because you were late on your mortgage.
One late payment of more than 30 days can drop your score more than “just a little bit”.
Make all of your payments on time. Automation can truly help to get your bills paid on time. You will need to make sure you have the money to cover every bill first.
13. Rate shopping for mortgage or auto loans hurt your credit
Opening new lines of credit accounts for 10% of your credit score so when the creditors see you opening multiple lines of credit, you may think that your score will decrease.
However, creditors will often bundle these multiple “inquiries” into one as long as they are all within a 14 day period and for the same amount. This will tell them that you aren’t opening 5 lines of credit, you are just looking for the best one.
14. Credit reporting errors won’t happen to you
Sadly, you are mistaken. People make mistakes. A single flip of one digit can mean that someone’s debt was tied to your social or that the amount of debt had too many zeros.
This can happen to anybody. And if you think you are immune to accidents, it will be way too late to recover from the mess someone else made for you. Protect yourself and check your credit frequently.
Tip: call the credit bureaus to make sure that you have have 1 credit report under your social security number.
Not true. In relation to the way that credit scores are calculated, all debt is not equal.
If a creditor sees that you have racked up $125,000 of credit card debt, that is very bad. But if a creditor sees that you have a $125,000 mortgage, then the weight of the credit mix is in your favor.
You see, in the eyes of the creditor, having a mortgage is a responsible debt as long as payments are made on time. While credit cards are seen as irresponsible.
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16. Closing a credit card will help improve your score
Nope. Here’s why.
Length of credit history- when you close your credit card form 2007, you lose all that history of credit. Since length of history is worth 15% of your credit score, you will see a decrease in your score.
Debt utilization- let’s say you paid off a credit card with a $10,000 limit. You have another credit card with a $2,000 limit and owe $1,000 on it. Your total available debt to borrow is $12,000 and you are only using about 8% of your available credit. However, if you were to close that account, then your total available credit is now only $2,000 and you are using 50% of it!
Keep the card open but shred, cut, and don’t use it. Unless you have to.
I have an old credit card from high school that I still have open. I have to use it at least once a year to prevent it from closing from inactivity so I make one purchase a year and pay it back in full.
17. Your current or prospective employer can see your credit score
Contrary to popular belief, your employer cannot actually see your credit score.
What they can see is your credit report, even then, what they can see is different from what you see and what lenders see. They don’t get the full picture.
Also, they need your permission to run a report. Many employers don’t have the need to check your credit score anyway, unless you work in finance. I can see that being something to consider.
18. Your credit score accounts for demographics
Your credit score doesn’t discriminate. It doesn’t matter whether you are low income, rich, middle class, or homeless. It doesn’t care if you are Latino, Caucasian, African American, Asian, or blue and yellow.
All it cares about is how you manage your credit.
19. Everyone has a credit score
Actually, if you have never taken out a loan, don’t own a credit card and have nothing in your name, you probably don’t have a credit score.
It’s rare but it can happen.
If you have no score, you have an option. Open a secured credit card, charge it, and pay it off in full and on time each month.
20. The credit score you see is the same one that your lender sees
This is false. Unfortunately, when you check your score, it is not the same one that your lender will see or use. You never know which one your lender will see and your credit score can change from day to day depending on the activity it sees.
Your Transunion credit score can be a 50 point difference from your Equifax or Experian score.
So, focus on making your payments on time. Don’t close old accounts and don’t take on any new debt while you are applying for loans.
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21. Having a bad credit score means that you’ll never be approved for any loans
Fortunately, this is not the case. You can get approved but the options are limited. Of the limited options that are available, they usually come with a high security deposit and/or high interest rate (think 36% APR).
Work on improving your credit score so that you can get better rates. You don’t want the interest rates sending you into more debt.
In fact, instead of applying for a loan, save for whatever you need instead. Work your butt off to make sure that you don’t keep digging yourself into a hole.
22. Applying for new credit significantly drops your score
Keep in mind that new credit inquiries accounts for 10% of your score. If you are applying for new credit every month and using that credit, then your score will drop.
You will see a drop in your score for each inquiry but if your new credit allowance creates a significant drop in your credit utilization (30% of your credit score), the drop you see may not be as much as you thought.
23. If your are debt free, that means you have a good credit score
False. Just because you have no debt does not mean that you have a good credit score. If you have never had any debt, it could mean that there is no history of you borrowing money so lenders won’t necessarily know how much of a risk you are if there is no history.
24. Paying off your balance every month hurts your score
This one goes hand in hand with #5. Please, please pay off your credit cards every month. Having a balance does not give you brownie points. All you are doing is allowing yourself to pay interest. You are losing money this way.
25. Bankruptcy lets you start over
Nope. While bankruptcy will rid your debt, the affect it has on your credit and score will make it very difficult for you to “start fresh”.
Lenders will see the bankruptcy for up to 10 years and while you can improve your credit score before that 10 years, the fact that you had to declare bankruptcy in the first place makes you seem untrustworthy of lending money to.
26. Co-signing won’t impact your score
Anytime you co-sign a loan for someone, you are tying our name to the loan. When that loan has missed payments, you are also responsible. When that loan goes into default, you are responsible.
If that person cannot make the payments, they will come after you for the payments and it greatly affects your credit score.
Never ever co-sign a loan that you know you won’t be able to pay off if the person cannot make the payments.
27. Your credit score is on your credit report
Surprisingly, this is not true.
Your credit score is not on your credit report. They are to separate entities. Your credit report will give you a full detailed report of who you owe money to and how much you owe them.
A credit score is comprised of 3 numbers based on specific calculations as mentioned above.
There you have it; credit score myths that you need to stop believing. Some things to take from this article is that nothing is black and white. There are many factors when determining your credit score. If you and a friend apply for the same credit card, you may see a drop of 10 points but she may see a drop in 30 points. You both have different credit history and each inquiry will affect both of your scores differently.
If you are interested in learning the secrets of people who have excellent credit, then I suggest you read that article. Having an excellent credit score and report will help you save thousands of dollars per year.
What other myths have you heard regarding your credit? Comment below.
Edited: this article has been professionally reviewed for accuracy and clarification