Credit Sesame debunks some common credit score myths and misconceptions.
Credit scores are essential to modern life, playing a critical role in securing loans, credit cards, and even apartment rentals. However, myths and misconceptions surrounding credit scores can lead to confusion and financial mistakes. Here are some of the most common credit score myths and misconceptions.
Myth #1: Checking your own credit score hurts your credit
Many people believe that checking their credit score negatively affects it. However, checking your own credit score is a soft inquiry and does not impact your score. Only hard inquiries, such as those made when applying for a loan or credit card, impact your score. Regularly checking your credit score is a useful way to monitor your credit health and detect errors or fraudulent activity.
Myth #2: Age or income affects your credit score
Your age and income do not directly affect your credit score. Your income can indirectly affect your credit score by impacting your ability to make payments and manage debt. For example, high debt despite a high income leads to a high debt-to-income ratio. This affects your credit score negatively. Similarly, if you are retired and on a fixed income, managing debt and making payments may be challenging and have an indirect impact on your score.
Myth #3: Closing a credit card improves your credit score
Closing a credit card you no longer use may seem beneficial, but it can negatively affect your credit score. Closing a credit card reduces the length of your credit history and lowers your credit utilization rate. Credit utilization measures the amount of credit you use compared to the amount available. Closing a credit card lowers the amount of credit available and increases your credit utilization rate. Additionally, the length of your credit history is an important factor in your credit score. Closing a long-held credit card reduces the average length of your credit history, negatively impacting your score.
Myth #4: Paying off a debt removes it from your credit report
Paying off a debt does not mean it is removed it from your credit report. The debt remains on your report for seven years from the date it was first reported. But paying off debt reduces your debt-to-income ratio and improves your payment history, positively impacting your credit score.
Myth #5: Credit repair companies can fix your credit score
Credit repair companies may claim to fix your credit score, but it results from things you do or can do yourself. They may charge high fees for ineffective or, in some cases, fraudulent services. Improving your credit score requires practicing good credit habits, such as making timely payments, keeping credit utilization low, and maintaining a healthy mix of credit types. Credit monitoring and building tools may be useful in helping you repair or build credit, but in and of themselves do not build credit. You do that.
Myth #6: You only have one credit score
You have multiple credit scores as lenders and credit bureaus use several different credit scoring models. The most common models are the FICO score and VantageScore models, ranging from 300 to 850. Additionally, credit bureaus may have different credit scores due to variations in their credit report information.
Myth #7: Your credit score is fixed and unchangeable
Your credit score is not set in stone and can change over time based on your credit behavior. By practicing responsible credit use, such as paying bills on time, keeping credit utilization low, and avoiding unnecessary credit applications, you can improve your score over time. On the flip side, engaging in negative credit behavior, such as missing payments or maxing out credit cards, can lower your score.
Myth #8: Your credit score considers your gender, race, or marital status
Your gender, race, or marital status is not part of your credit score calculation. The Equal Credit Opportunity Act prohibits credit discrimination based on these factors.
Myth #9: Paying bills on time is the only factor that affects your credit score
Timely payments are crucial, but other factors impact your credit score. Credit utilization, length of credit history, types of credit used, and credit inquiries also affect your score. Credit utilization measures the amount of credit you use compared to the amount available, and experts recommend keeping it below 30%. The length of your credit history also matters. A longer credit history indicates more stable credit behavior. A healthy mix of credit types, such as credit cards, loans, and mortgages, may also impact your score positively. Hard credit inquiries that occur when applying for a loan or credit card impact your score. Soft inquiries, such as checking your own credit score or pre-approved offers, do not impact your score.
Myth #10: Canceling unused credit cards improves your credit score
Canceling unused credit cards may seem like a smart move to declutter your financial life, but it can hurt your credit score. Your credit utilization ratio may increase as the total amount of credit available to you decreases. Moreover, canceling a credit card reduces the average age of your credit accounts, affecting the length of your credit history.
Myth #11: A high income equals a high credit score
Your income is not a direct factor in calculating your credit score. Instead, your credit behavior, such as payment history and credit utilization, determines your score. A high income can affect your credit score indirectly by providing you with more financial resources to manage your debt and make payments on time.
Myth #12: Medical bills do not impact your credit score
Medical bills can impact your credit score, just like any other debt. If unpaid, medical bills can end up in collections and negatively impact your payment history. Some credit scoring models, such as FICO Score 9 and VantageScore 4.0, weigh medical debts less heavily than others.
Myth #13: Maxing out a credit card won’t hurt your credit score if you make timely payments
Maxing out a credit card can hurt your credit score, even if you make timely payments. Credit utilization, or the amount of credit you use compared to the amount available, affects your score, and maxing out a credit card increases your utilization rate. Ideally, you keep your credit utilization below 30%.
Myth #14: Closing a credit card removes it from your credit report immediately
Closing a credit card does not remove it from your credit report immediately. Instead, the closed account remains on your credit report for up to ten years from the closing date. The account history, such as payment history and credit utilization, remains on your report also.
Myth #15: A credit score of 700 or above is considered excellent
A credit score of 700 or above is generally considered good, but is not necessarily excellent. FICO scores range from 300 to 850; above 800 is considered excellent. However, different lenders may have different credit score requirements for loan approval.
Myth #16: Applying for a loan or credit card always hurts your credit score
Applying for a loan or credit card results in a hard inquiry, which can lower your credit score temporarily. However, the impact is usually minor, and your score should recover within a few months. Applying for multiple credit accounts in a short period can significantly impact your score, so it’s best to limit applications to those you need.
Myth #17: Your credit score is the same across all three credit bureaus
There are three major credit bureaus, Equifax, Experian, and TransUnion. Each calculates credit scores slightly differently. While the factors that impact your score are pretty much the same, the weight assigned to each factor can vary somewhat between bureaus. As a result, it’s possible to have slightly different scores from each bureau.
Myth #18: Your employer can check your credit score
Employers can indeed check your credit report but cannot access your credit score without your permission. Normally, employers check your credit report only if the job involves financial responsibilities, such as working in a bank or handling company finances.
Myth #19: Not using credit is the best way to have a perfect credit score
Responsible credit use can help improve your score. But not using credit at all can hurt your score. Your credit score is based on your credit history, so if you have no credit history, there is no information for lenders to assess your creditworthiness. This can make it harder to qualify for loans or credit cards.
Myth #20: Your credit score reflects your overall financial health
Your credit score is an important factor in your overall financial health but does not provide a complete picture of your financial situation. Your credit score reflects only your past credit behavior, such as how often you make timely payments and how much credit you use. It does not consider other financial factors like income, savings, or investments. Including your credit score and other financial metrics is important when assessing your overall financial health.
Credit score myths and misconceptions
Understanding credit scores is crucial to maintaining good credit health. Myths and misconceptions surrounding credit scores are common. By debunking these common myths and misconceptions, you can better understand how credit scores work and how to maintain a healthy credit score. Remember to check your credit score regularly, practice responsible credit use, and avoid unnecessary credit applications to help ensure your credit remains in good standing.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.