5 credit myths debunked

5 credit myths

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Credit Sesame highlights five credit myths and explains the facts behind the myths.

Myths, fairy tales, and legends… some are harmless. They are stories to make us feel better, like Camelot and the Round Table, or as a way to reward children, like Easter bunnies and the tooth fairy. But some can be pretty scary (Hansel and Gretel, anyone?) and costly, especially in the real world. To live happily ever after when it comes to your credit, it pays to know the truth.

Myth #1: You only have one credit score.

Fact: You actually have three credit reports, one from each major bureau (Equifax, Experian, and TransUnion), and with each report comes a corresponding credit score. There are two scoring models used by credit bureaus, FICO and VantageScore. Each uses your credit history to generate a three-digit score ranging from 300 to 850. Slight differences in reported information and scoring models can create variations between your FICO, VantageScore, and even among your FICO scores from different bureaus. Don’t fret over minor variations, but significant discrepancies (50+ points) warrant investigation.

Regularly checking your reports and scores from all sources is helpful in identifying errors, potential fraud, and changes in your financial health. Take advantage of free annual credit reports and dispute any inaccuracies. By understanding your unique credit landscape, you can make informed financial decisions and navigate your credit journey with confidence.

Myth #2: Checking your credit report isn’t as important as keeping tabs on your credit score.

Fact: Just checking your credit score may not be enough. Think of it like using a broken scale – the number might be comforting, but it’s inaccurate. While credit scores are important, they reflect your credit report, which is the detailed history of your borrowing habits.

Imagine driving with a faulty dashboard light – sure, things seem okay, but a hidden issue could cause bigger problems later. Similarly, ignoring errors in your credit report can negatively impact your score and future financial opportunities. Checking your report annually, fixing errors, and then monitoring your score empowers you to take control of your credit health. Remember, healthy credit starts with a clean report.

Myth #3: You must carry a balance on your credit cards to have a good credit score.

Fact: No, you don’t. Carrying a balance on your credit card is a myth. Contrary to popular belief, good credit comes from using your card and paying in full each month. Carrying a balance actually hurts your score by increasing your credit utilization ratio, which factors heavily (30%) into your score.

Aim to keep your credit utilization ratio below 30% and ideally below 10%. This means using your card responsibly and paying it off completely to demonstrate you manage credit wisely. Good credit scores come from smart habits and not carrying debt.

Myth #4: Bad news can affect your score for seven years

Fact: It’s true that negative information like bankruptcy can linger on your credit report for 7-10 years. Chapter 13 bankruptcy disappears after seven years, while Chapter 7 takes ten years to fade. But don’t despair. The impact of these blemishes weakens over time, and your recent financial behavior plays a more significant role in determining your score.

Even a missed payment, while staying on your report for seven years, carries less weight further down the line. The magic is in focusing on positive actions:

  • Make all payments on time and in full, consistently. Recent on-time payments have a greater impact than past mistakes.
  • Bring down your credit utilization ratio. Aim for below 30% of your credit limit to show responsible credit management.
  • Consider disputing any errors in your report. Inaccurate information can unfairly lower your score.

By consistently demonstrating responsible credit habits, you can mitigate the effects of past missteps and watch your score gradually improve. Remember, the key is to focus on the present and build a positive credit history for a brighter financial future!

Myth #5: Shopping around for a loan hurts your score.

Fact: Applying for multiple loans might raise a red flag, but don’t let comparison shopping scare you. Inquiries for the same type of loan, like mortgages or auto loans, within a 14-day window count as one on your credit report. This “grace period” helps you compare rates without major score damage.

However, beware of credit card applications! Multiple credit card inquiries within a short time can individually impact your score. Space out your card applications or stick to pre-qualified offers to minimize inquiries and protect your score.

Remember, responsible comparison shopping helps you find the best loan terms while minimizing score impact. Just be mindful of credit card inquiries and utilize the 14-day grace period for other loan types.

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You can see your credit picture at a glance with Sesame Ring™. The unique user interface enables easy and intuitive review of TransUnion data. Credit report information from all three bureaus is available if you choose to upgrade to Premium. In addition to data and information, the app provides a measure of overall credit health with your Sesame Grade™, and provides alerts, personalized action plans and AI-driven customer support. As you embark on your journey of credit and financial health improvement, knowledge is your most potent asset. Insights from all three bureaus can help you make sound financial choices, negotiate from a position of strength, and nurture your credit health. Regular reviews enable you to maintain accuracy, detect discrepancies and shape your financial future with confidence. Remember that credit is a tool that, when used wisely, can open doors to financial opportunities.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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