Credit Score 16: Credit Score Myths: Busting Common Credit Score Myths: What You Should Know

1. What is a credit score and why does it matter?

A credit score is a numerical representation of your creditworthiness, or how likely you are to repay your debts on time. It is based on your credit history, which includes your payment behavior, credit utilization, length of credit history, types of credit, and new credit inquiries. Your credit score matters because it can affect your ability to access credit, such as loans, mortgages, credit cards, and other financial products. It can also influence the interest rates and fees you pay, as well as your eligibility for certain benefits, such as insurance, rental agreements, and utility services. Having a good credit score can help you save money and achieve your financial goals, while having a bad credit score can limit your options and cost you more in the long run.

However, there are many myths and misconceptions about credit scores that can confuse or mislead consumers. Some of these myths are based on outdated information, inaccurate assumptions, or common misunderstandings. In this section, we will bust some of the most common credit score myths and explain what you should know instead. Here are 16 credit score myths and the truth behind them:

1. Myth: Checking your credit score will lower it. Truth: Checking your own credit score will not affect it in any way. This is called a soft inquiry, which does not impact your credit score. However, when a lender or a creditor checks your credit score as part of an application process, this is called a hard inquiry, which can temporarily lower your credit score by a few points. This is because hard inquiries indicate that you are seeking new credit, which may increase your credit risk. However, the impact of hard inquiries is usually minimal and short-lived, and it can be offset by making timely payments and keeping your credit utilization low.

2. Myth: You only have one credit score. Truth: You actually have multiple credit scores, depending on the credit bureau and the scoring model used. There are three major credit bureaus in the US: Equifax, Experian, and TransUnion. Each of them collects and reports your credit information, which may vary slightly due to different sources, methods, and timing. There are also different scoring models that use different algorithms and criteria to calculate your credit score, such as FICO and VantageScore. Each scoring model may have different versions and ranges, and they may weigh the factors differently. For example, the FICO score ranges from 300 to 850, while the VantageScore ranges from 300 to 850. Therefore, your credit score may differ depending on which credit bureau and which scoring model is used. The most important thing is to monitor your credit score regularly and look for trends and changes, rather than focusing on a specific number.

3. Myth: Closing old or unused accounts will improve your credit score. Truth: Closing old or unused accounts may actually hurt your credit score, especially if they have a positive payment history and a high credit limit. This is because closing an account will reduce your available credit, which will increase your credit utilization ratio, or the percentage of your total credit that you are using. Your credit utilization ratio is one of the most influential factors in your credit score, and the lower it is, the better. Ideally, you should keep your credit utilization ratio below 30%. Closing an account will also reduce the average age of your accounts, which is another factor in your credit score. The longer your credit history, the more information lenders have to assess your creditworthiness. Therefore, it is usually better to keep your old or unused accounts open, as long as they do not charge you fees or tempt you to overspend.

4. Myth: Paying off your debt will erase any negative marks on your credit report. Truth: Paying off your debt is a good thing, but it will not erase any negative marks on your credit report, such as late payments, collections, charge-offs, bankruptcies, or foreclosures. These negative marks will remain on your credit report for seven to ten years, depending on the type and severity of the delinquency. However, the impact of these negative marks will diminish over time, as your credit report reflects your most recent credit activity. Therefore, paying off your debt will help you improve your credit score in the long run, as you will demonstrate your ability and willingness to repay your obligations. However, you should not expect your credit score to jump immediately after paying off your debt, as it will take time for your credit history to recover from any past mistakes.

5. Myth: You need to carry a balance on your credit card to build your credit score. Truth: You do not need to carry a balance on your credit card to build your credit score. In fact, carrying a balance on your credit card will cost you interest and fees, and it will increase your credit utilization ratio, which can lower your credit score. The best way to build your credit score with a credit card is to use it responsibly and pay off your balance in full and on time every month. This will show that you can manage your credit well and avoid getting into debt. It will also help you avoid paying unnecessary interest and fees, which will save you money and improve your financial health.

2. Checking your credit score will lower it

One of the most common credit score myths is that checking your own credit score will lower it. This is not true, and in fact, checking your credit score regularly can help you monitor your financial health and spot any errors or fraud. However, not all credit inquiries are the same, and some can have a negative impact on your credit score. In this section, we will explain the difference between hard and soft credit inquiries, how they affect your credit score, and how you can check your credit score for free without hurting it.

- Hard credit inquiries are when a potential lender, such as a bank, credit card company, or mortgage lender, pulls your credit report to make a lending decision. This usually happens when you apply for a new credit card, loan, or mortgage. Hard inquiries can lower your credit score by a few points, and they stay on your credit report for two years. However, the impact of hard inquiries diminishes over time, and they are not a major factor in your credit score calculation. Furthermore, if you have multiple hard inquiries for the same type of credit within a short period of time, such as shopping for a mortgage, they are usually treated as a single inquiry, as long as they are done within a 14- to 45-day window, depending on the credit scoring model used.

- Soft credit inquiries are when you or someone else checks your credit report for informational or promotional purposes. This includes checking your own credit score, getting pre-approved offers from lenders, or having your credit checked by an employer or landlord. Soft inquiries do not affect your credit score at all, and they are only visible to you, not to other lenders. You can check your credit score as often as you want without any negative consequences, as long as you use a reputable source that provides soft inquiries.

- How to check your credit score for free without hurting it: There are many ways to check your credit score for free without impacting it. Here are some of the most common ones:

1. Use a free credit score service. There are many online platforms that offer free credit score services, such as Credit Karma, Credit Sesame, WalletHub, and NerdWallet. These services provide you with your credit score from one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. They also give you access to your credit report, credit monitoring, and personalized tips to improve your credit. These services use soft inquiries to access your credit information, so they do not affect your credit score.

2. Use a credit card or bank that offers free credit score access. Many credit card issuers and banks provide their customers with free access to their credit score, either on their monthly statements, online accounts, or mobile apps. Some of the credit card companies that offer this benefit are American Express, Bank of America, Capital One, Chase, Citi, Discover, and Wells Fargo. Some of the banks that offer this benefit are Ally Bank, Bank of America, Chase, Citi, PNC, US Bank, and Wells Fargo. These services also use soft inquiries to access your credit information, so they do not affect your credit score.

3. Request a free credit report from the official source. You are entitled to one free credit report every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can request your free credit report online at www.annualcreditreport.com, by phone at 1-877-322-8228, or by mail. Your credit report contains your credit history, such as your accounts, balances, payments, and inquiries. However, it does not include your credit score. You can use your credit report to check for any errors or fraud, and to get an idea of how your credit score is calculated. Requesting your free credit report does not affect your credit score, as it is considered a soft inquiry. However, if you want to get your credit score from the official source, you will have to pay a fee, which may result in a hard inquiry.

3. Closing old accounts will improve your credit score

In this section, we will explore the common credit score myth that closing old accounts will improve your credit score. It is important to note that this myth is not entirely accurate and can lead to misunderstandings about how credit scores are calculated.

1. Different Perspectives:

When it comes to the impact of closing old accounts on your credit score, there are different perspectives to consider. Some individuals believe that closing old accounts can help improve their credit score by removing any negative history associated with those accounts. On the other hand, some argue that closing old accounts can actually have a negative impact on your credit score.

2. credit History length:

One key factor that affects your credit score is the length of your credit history. Closing old accounts can potentially shorten your credit history, which may have a negative impact on your credit score. This is because credit scoring models consider the length of your credit history as an indicator of your creditworthiness. Therefore, closing old accounts may remove valuable information that demonstrates your ability to manage credit responsibly over time.

3. Credit Utilization Ratio:

Another important factor in credit scoring is your credit utilization ratio, which is the amount of credit you are currently using compared to your total available credit. Closing old accounts can potentially increase your credit utilization ratio if you have outstanding balances on other accounts. This can negatively impact your credit score, as a higher credit utilization ratio is generally seen as a higher risk to lenders.

4. Mix of Credit:

Having a diverse mix of credit accounts, such as credit cards, loans, and mortgages, can positively impact your credit score. Closing old accounts may reduce the diversity of your credit accounts, which can potentially lower your credit score. Lenders like to see that you can responsibly manage different types of credit, and closing old accounts may limit this aspect of your credit profile.

5. Examples:

To illustrate the potential impact of closing old accounts on your credit score, let's consider a scenario. Imagine you have three credit cards: Card A, Card B, and Card C. Card A is your oldest account, with a long history of on-time payments. Card B is a newer account, and Card C is a recently opened account. If you decide to close Card A, it may shorten your credit history and reduce the diversity of your credit accounts, which can have a negative impact on your credit score.

The myth that closing old accounts will improve your credit score is not entirely accurate. While there may be certain situations where closing old accounts can be beneficial, it is important to consider the potential negative impact on your credit score, such as the reduction in credit history length and credit utilization ratio. It is always recommended to consult with a financial advisor or credit expert before making any decisions that may affect your credit score.

4. You only have one credit score

One of the most common misconceptions about credit scores is that you only have one. In reality, there are many different types of credit scores, each calculated by a different company or organization using different methods and data sources. Your credit score can vary depending on which scoring model is used, which credit bureau is reporting your information, and what purpose the score is intended for. Here are some facts you should know about the different credit scores you may have:

1. There are three major credit bureaus in the U.S.: Equifax, Experian, and TransUnion. Each of these bureaus collects and maintains information about your credit history, such as your payment history, credit accounts, balances, inquiries, and public records. They also sell your credit reports to lenders, employers, landlords, and other entities that need to evaluate your creditworthiness.

2. Each credit bureau may have a different version of your credit report, depending on the information they receive from your creditors and other sources. This means that your credit score may differ from one bureau to another, even if they use the same scoring model. For example, if you have a credit card that reports to Equifax and TransUnion, but not to Experian, your credit score based on your Experian report may be lower than your scores based on your Equifax and TransUnion reports.

3. There are many different scoring models that can be used to calculate your credit score, such as FICO, VantageScore, and others. Each scoring model has its own formula and criteria for weighing the factors that affect your credit score, such as your payment history, credit utilization, length of credit history, mix of credit types, and new credit inquiries. Different scoring models may also have different ranges and scales for your credit score. For example, the FICO score ranges from 300 to 850, while the VantageScore ranges from 501 to 990.

4. Different scoring models may also be designed for different purposes, such as auto loans, mortgages, credit cards, personal loans, and others. Each purpose may have its own scoring model that emphasizes certain aspects of your credit history more than others. For example, an auto loan score may focus more on your history of paying car loans, while a mortgage score may focus more on your history of paying home loans. Different lenders may also use different scoring models depending on their preferences and policies.

5. Your credit score is not a static number that stays the same forever. It is a dynamic and constantly changing reflection of your credit behavior and situation. Your credit score can change every time your credit report is updated with new information, such as a new payment, a new account, a new inquiry, or a change in your balance. Your credit score can also change when the scoring model or the credit bureau changes their methods or criteria for calculating your score.

As you can see, there is no such thing as a single, definitive credit score that represents your creditworthiness. You have multiple credit scores that may vary depending on various factors. Therefore, it is important to check your credit reports and scores from different sources regularly and understand how they are calculated and used. This way, you can monitor your credit health, identify and correct any errors, and improve your credit score over time.

5. Paying off your debt will erase negative history

Myth 4: Paying off your debt will erase negative history

When it comes to credit scores, there are several myths that can lead to misunderstandings. One common myth is that paying off your debt will automatically erase any negative history associated with it. However, this is not entirely accurate.

1. Credit history and its impact: Your credit history plays a significant role in determining your credit score. It includes information about your payment history, outstanding debts, and the length of your credit accounts. Negative information, such as late payments or defaults, can stay on your credit report for a certain period of time, typically up to seven years.

2. Positive impact of paying off debt: While paying off your debt is generally a positive financial move, it doesn't instantly remove negative history from your credit report. However, it can have a positive impact on your credit score over time. By paying off your debts, you demonstrate responsible financial behavior, which can improve your creditworthiness.

3. Time as a factor: The passage of time is an important factor in credit history. As negative information ages, its impact on your credit score diminishes. So, while paying off your debt won't erase negative history, it can help in the long run by showing a pattern of responsible financial behavior.

4. Credit utilization ratio: Another important factor in credit scoring is your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. Paying off debt can lower your credit utilization ratio, which can positively impact your credit score.

5. Professional advice: It's always a good idea to seek advice from credit counselors or financial professionals who can provide personalized guidance based on your specific situation. They can help you understand the best strategies for managing your debt and improving your credit score.

Remember, while paying off your debt is a positive step, it may not immediately erase negative history from your credit report. It's important to maintain good financial habits, such as making timely payments and keeping your credit utilization low, to improve your credit score over time.

6. You need to carry a balance to build credit

In this section, we will explore the common credit score myth that suggests you need to carry a balance in order to build credit. It is important to note that this myth has been widely debated among financial experts and individuals. While some may argue that carrying a balance can have a positive impact on your credit score, it is essential to understand the different perspectives and provide you with accurate information.

1. The Myth Explained:

The myth suggests that by carrying a balance on your credit card and making regular payments, you can demonstrate responsible credit behavior and improve your credit score. The idea behind this myth is that having an ongoing balance shows lenders that you can manage debt effectively.

2. The Reality:

contrary to popular belief, carrying a balance is not a requirement for building credit. Your credit score is determined by various factors, including payment history, credit utilization, length of credit history, and types of credit. While making timely payments is crucial, carrying a balance does not necessarily contribute to a higher credit score.

3. Credit Utilization:

One aspect to consider is credit utilization, which refers to the percentage of your available credit that you are currently using. It is generally recommended to keep your credit utilization below 30% to maintain a healthy credit score. However, this does not mean you need to carry a balance. You can achieve a low credit utilization by paying off your credit card balance in full each month.

4. Payment History:

Your payment history plays a significant role in determining your credit score. Making consistent, on-time payments is crucial for building a positive credit history. Whether you carry a balance or not, it is essential to pay your credit card bill in full and on time to demonstrate responsible credit behavior.

5. Building Credit:

To build credit effectively, focus on establishing a history of responsible credit usage. This can be achieved by using your credit card for small purchases and paying off the balance in full each month. By doing so, you demonstrate your ability to manage credit responsibly without carrying a balance.

6. Examples:

Let's consider two scenarios to illustrate this point. In Scenario A, you carry a balance of $500 on your credit card and make regular payments. In Scenario B, you pay off your credit card balance in full each month. Both scenarios can contribute positively to your credit score as long as you make timely payments. However, carrying a balance in Scenario A does not provide any additional benefit compared to paying off the balance in full in Scenario B.

The myth that suggests you need to carry a balance to build credit is not entirely accurate. While credit utilization and payment history are important factors, carrying a balance is not a requirement for building a strong credit score. Focus on making timely payments, keeping your credit utilization low, and using credit responsibly to establish a positive credit history.

7. Your income and assets affect your credit score

One of the most common credit score myths is that your income and assets affect your credit score. Many people assume that having a high salary or a lot of savings will automatically boost their credit score, or that having a low income or few assets will lower it. However, this is not true. Your credit score is based on how you manage your credit, not how much money you make or have. Here are some reasons why your income and assets do not affect your credit score:

- Your credit report does not include your income or assets. The credit bureaus that calculate your credit score do not have access to your income or asset information, unless you voluntarily provide it to them. They only collect information from your creditors, such as your payment history, credit utilization, credit mix, and credit inquiries. Therefore, your income and assets are not factors in your credit score calculation.

- Your credit score measures your creditworthiness, not your wealth. Your credit score is a numerical representation of how likely you are to repay your debts, based on your past and current credit behavior. It does not reflect how much money you have or how much you can afford to borrow. A person with a high income and a lot of assets can still have a low credit score if they miss payments, max out their credit cards, or default on their loans. Conversely, a person with a low income and few assets can have a high credit score if they pay their bills on time, keep their credit utilization low, and maintain a good credit mix.

- Your income and assets may affect your ability to get credit, but not your credit score. While your income and assets do not directly impact your credit score, they may influence your ability to qualify for credit or get better terms from lenders. Lenders may look at your income and assets, along with your credit score and other factors, to determine your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying your debts. A lower debt-to-income ratio indicates that you have more disposable income and can handle more debt. Lenders may also look at your assets, such as your savings, investments, or property, to assess your collateral, which is the value of the assets that you can use to secure a loan or repay it in case of default. Having more income and assets may help you get approved for credit or get lower interest rates, but they will not affect your credit score.

8. You cant improve your credit score quickly

When it comes to credit scores, there are many myths that can mislead individuals seeking to improve their creditworthiness. One common myth is that you can't improve your credit score quickly. However, this belief is not entirely accurate, as there are several strategies that can help expedite the process of boosting your credit score.

1. Understand the Factors: To effectively improve your credit score, it's crucial to understand the factors that influence it. Payment history, credit utilization, length of credit history, credit mix, and new credit inquiries all play a role in determining your credit score. By focusing on these factors, you can identify areas for improvement and take targeted actions.

2. Timely Payments: One of the most impactful ways to improve your credit score quickly is by making timely payments. Paying your bills on time demonstrates responsible financial behavior and can positively impact your credit history. Set up automatic payments or reminders to ensure you never miss a payment.

3. Reduce credit utilization: credit utilization refers to the percentage of your available credit that you're currently using. Keeping your credit utilization below 30% is generally recommended. By paying down existing debts and keeping your credit card balances low, you can lower your credit utilization ratio and potentially boost your credit score.

4. diversify Your Credit mix: Having a diverse mix of credit accounts, such as credit cards, loans, and mortgages, can positively impact your credit score. Lenders like to see that you can manage different types of credit responsibly. However, it's important to only take on credit that you can comfortably handle.

5. Limit New Credit Inquiries: Each time you apply for new credit, a hard inquiry is recorded on your credit report. Multiple inquiries within a short period can negatively impact your credit score. Minimize unnecessary credit applications and only apply for credit when necessary.

6. correct Errors on Your Credit report: Regularly reviewing your credit report for errors is essential. Mistakes on your report can drag down your credit score. If you identify any inaccuracies, dispute them with the credit bureaus to have them corrected.

7. seek Professional guidance: If you're struggling to improve your credit score or need personalized advice, consider consulting with a credit counselor or financial advisor. They can provide expert guidance tailored to your specific situation.

Remember, while it is possible to improve your credit score quickly, it's important to approach the process with patience and consistency. By implementing these strategies and maintaining responsible financial habits, you can work towards achieving a better credit score.

9. How to monitor and boost your credit score?

In this blog, we have busted some common credit score myths and explained what you should know about how credit scores work. We hope that you have learned something new and useful from this blog. But before we end, we want to give you some tips on how to monitor and boost your credit score. monitoring your credit score is important because it can help you spot any errors or frauds on your credit report, and also help you track your progress towards your financial goals. boosting your credit score can help you qualify for better interest rates and terms on loans and credit cards, and also improve your chances of getting approved for them. Here are some ways to monitor and boost your credit score:

1. check your credit report regularly. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year through www.annualcreditreport.com. You can also use some free online services or apps that provide you with your credit score and credit report. review your credit report carefully and dispute any errors or inaccuracies that you find. errors on your credit report can lower your credit score and affect your creditworthiness.

2. Pay your bills on time and in full. Your payment history is the most important factor in your credit score, accounting for 35% of it. Paying your bills on time and in full shows that you are a responsible borrower and can manage your debt well. Late or missed payments can hurt your credit score and stay on your credit report for up to seven years. If you have trouble remembering your due dates, you can set up automatic payments or reminders to avoid missing any payments.

3. Keep your credit utilization low. Your credit utilization is the ratio of your total credit card balances to your total credit card limits, and it affects 30% of your credit score. A high credit utilization indicates that you are relying too much on your credit cards and may have difficulty paying them off. A low credit utilization shows that you are using your credit cards wisely and have enough available credit. A good rule of thumb is to keep your credit utilization below 30%, and ideally below 10%. You can lower your credit utilization by paying off your credit card balances, requesting a credit limit increase, or using fewer credit cards.

4. Maintain a good mix of credit. Your credit mix is the diversity of your credit accounts, such as credit cards, loans, mortgages, etc. It affects 10% of your credit score. Having a good mix of credit shows that you can handle different types of credit and debt. However, this does not mean that you should open new credit accounts just to improve your credit mix. Only apply for new credit when you need it and when you are confident that you can repay it. Applying for too many credit inquiries in a short period of time can lower your credit score and make you look desperate for credit.

5. Avoid closing old credit accounts. The length of your credit history is another factor that affects 15% of your credit score. It is calculated by the average age of your credit accounts and the age of your oldest and newest credit accounts. A longer credit history shows that you have more experience and stability with credit. Closing old credit accounts can shorten your credit history and reduce your available credit, which can lower your credit score. Unless you have a compelling reason to close an old credit account, such as high fees or fraud, it is better to keep it open and use it occasionally to keep it active.

By following these tips, you can monitor and boost your credit score and enjoy the benefits of having a good credit score. Remember that improving your credit score takes time and patience, so don't expect to see immediate results. But with consistent and responsible credit behavior, you can achieve your credit goals and improve your financial health. Thank you for reading this blog and we hope that you have found it helpful. If you have any questions or feedback, please feel free to leave a comment below. We would love to hear from you.