Growing up, my dad drilled certain financial lessons into us kids. First, live below your means. Second, put at least 25% of your paycheck into savings or an investment account. Third, protect your credit score. These are all great pieces of advice. However, I never really understood how credit worked and felt stupid asking. Unfortunately, while I was attempting to improve my score as a young adult, I was actually making several mistakes. You might be making the same mistakes if you are buying into these credit score myths.
Debunking These 15 Credit Score Myths
Although you may have only heard a few of these, here are 15 of the most commonly believed credit score myths.
1. Regularly checking your credit score will lower it.
One of the worst mistakes I was making was not checking my credit score. Checking it regularly can help you monitor your progress and notice any fraudulent activity. However, I didn’t understand the difference between a “soft pull” and a “hard pull”, or how they affect my credit score.
Checking your score through one of the credit bureaus or your FICO with your bank is considered a “soft pull” and has no impact on it. However, applying for multiple credit cards or loans would require a “hard pull” which could lower your score and send a red flag to lenders.
2. Your score is the same with all the credit bureaus.
While it seems logical, there isn’t a universal formula to calculate your credit score. There are thousands of different scoring models which look at your history in a different way, with weighted values for various factors. So, your score could change depending on where you check it.
Although it has been a while since I looked at my official credit reports, they usually differ by a few points. While I usually rely on my FICO score, even that changed between banks. I had a 10-point difference even though it was the same tool!
3. All debt has the same impact.
While all debt affects your score, not all debts have the same impact. Regularly paying down revolving debts increases your credit utilization ratio (CUR). This usually carries more weight in the calculations. Making regular payments on installment loans will also improve your score, but not to the same extent as paying off credit cards or other revolving debt.
4. Carrying a balance on your credit cards will boost your score.
Although a history of regular payments will help your score, carrying a balance will not. In fact, it could cost you more in interest in the long run. And, it has the potential to hurt your credit score because it affects the CUR. The greater your balance, the higher your utilization rate. Generally speaking, a ratio of 10% or less is good. However, a rate of 30% or more could cause lenders to deny your application.
5. Having a perfect credit score gives you more opportunities.
The perfectionist in me bought into this myth hook, line, and sinker. It seems logical that the better your credit score, the more advantages you gain. However, there are no exclusive offers and loans for anyone in the 850 club. In reality, anyone with a score of about 760 will qualify for the best rates available.
6. Paying debt off quickly will remove it from credit reports entirely.
I used to believe that paying off balances quickly would prevent it from hurting my credit score. The sooner the debt is gone, the better it should be, right? I was very, very wrong. Instead of paying it off right away, a history of on-time payments will benefit you more. Making regular payments on revolving debt can increase your score, improve your CUR, and establish a history of repayment for potential lenders.
7. Closing credit card accounts will improve your score.
You would think that having fewer credit cards and lower debt would help you. But, closing credit card accounts you don’t use could work against you. It lowers your CUR since you have less available credit. Closing the account could actually lower your credit score.
8. Your credit score isn’t important when you’re young.
It baffles me that this is still one of the most common credit score myths. Your credit score is always important, perhaps even more so when you’re young. The length of your credit history is an important aspect of your credit score. You can start building credit when you turn 18 and establish a strong history which will help you later on when you apply for a loan. Therefore, the sooner you start building credit, the better your bargaining position will be when the time comes.
9. Student loans don’t affect your score.
I attribute this myth to wishful thinking. Unfortunately, all loans, including your student loans, will be on your credit report. Making regular, timely payments can increase your credit score. But, late or missing payments will hurt you. If you are struggling to meet the minimum monthly balances, call your lender to work out a payment schedule that benefits you both.
10. Employers can see your credit score.
This is a false misconception. Employers have access to a different type of credit report than creditors and lenders. They are typically looking for signs of financial stress. However, even if they pull your credit history, it won’t include your credit score.
11. Your income affects your credit score.
No matter how much you make, your salary has no direct effect on your credit score. Employers don’t report it to the credit bureaus, so it isn’t factored into your credit report. It only reflects information like the amount of credit you use and your payment history. But, be aware that lenders may ask for your income or employment history to ensure that you can meet their terms.
12. Having good credit means you’re well off.
Despite what some may think, your credit score has absolutely nothing to do with your income or bank account balances. Wealthy people can have terrible scores while some minimum-wage workers have perfect credit. Your score only indicates how you use your credit and manage your debt.
13. Your credit scores merge after marriage.
You and you alone are responsible for your credit score. Joint credit scores simply don’t exist. Even after you get married, you each retain your own score. But, if you have joint accounts or co-sign loans together, your payment history from shared debts could impact your individual credit scores.
14. Debit cards can help you build credit.
Although they look like credit cards, debit cards are linked to your checking account. Therefore, they don’t impact your credit score since you never use your available credit.
15. Credit repair companies will fix your credit score.
While these companies can help you create a plan to improve your credit, they don’t offer any services you couldn’t do yourself. Despite their claims, it is impossible to remove accurate data from your credit report, no matter how damaging it is. The only way to repair your credit is by taking steps toward better credit management.
Hopefully, some of you will learn from my experiences and avoid falling victim to these credit score myths. Don’t be afraid to ask questions. And when in doubt, it’s never a bad idea to reach out to your financial advisor. Since you’re paying for their expertise, you should take advantage of every resource at your disposal.
And finally, the bottom line is that having good credit really matters a lot – you need it to get a rental apartment, better rates on a mortgage, get access to some high end credit cards, etc.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
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