There are plenty of things to worry about when it comes to your finances. Don’t let credit score become another stressor. It can be difficult to tell what’s the truth and what’s not when it comes to credit score. Will your credit take a hit if you open a new account? Does a potential employer check your credit score? In this blog post, we’ll debunk some of the most common myths about credit.
Myth 1: There’s Only One Credit Score
You may actually have many credit scores, depending on several factors. In fact, the credit score that you check might be different from the one that a lender checks.
FICOⓇ has several ways to calculate a credit score, with FICOⓇ Score 8 being the most common method.
The type of scoring model used depends on the type of credit you’re applying for such as a credit card versus a home loan. You won’t know exactly which scoring model is used, since there are hundreds of variations that could affect your score.
Generally speaking, however, your credit score is calculated, they will be relatively close to each other. They may differ a little bit, but usually by no more than 50 points. You can help ensure your credit score is as high as possible by keeping your credit report free of errors, negative marks, and excessive debt.
Myth 2: Checking Your Credit Score Will Hurt Your Credit
Nope. Checking your own score is considered a “soft” credit pull, which means it won’t damage your score- at all. Now, if you “inquire” about your credit score when you apply for a loan or a credit card, your score might fall because that application suggests you’ll be adding debt. But, if you simply look at your own credit report, your score is unaffected and you’re being a responsible adult.
Myth 3: Closing a Credit Card Will Help Your Score
If you have a credit card you don’t use, you’re unlikely to improve your score by closing the account. In fact, closing the card might even lower your score. Generally, credit scoring models don’t measure risk by how much credit you have available, but rather by how much of that credit you’re using. This ratio is known as “credit utilization”. So, when you close an unused account, you reduce your total available credit and your credit utilization goes up.
Myth 4: The Amount of Money You Make and Have in the Bank Influences Your Score
Your income and bank balance aren’t considered when it comes to credit scoring. It all depends on factors like your repayment history, credit utilization, and the average age of your credit. Some factors that don’t affect your credit score include:
Gender
Age
Education
Marital status
Location
Myth 5: Employers Check Your Credit Score
No, employers don’t check your credit score. It’s actually against the law. However, they do pull your credit report to gauge how responsible and trustworthy you are as an individual. According to the Fair Credit Reporting Act (FCRA), you have to willingly sign a waiver to permit your employer to check your credit report*.
Myth 6: Credit is Difficult to Get if You Don’t Already Have It
You don’t need to go into debt to build a good credit score. Having a credit card and making payments can build your credit, but there are other ways, too. For instance, see if your utility company reports payments. Or, you can sign up for rent reporting services.
Building credit takes time. If you’re just starting out, it usually takes a year or two of positive credit history before you see a positive impact.
Myth 7: The Government Owns the Credit Bureaus
The credit bureaus are independent, commercial companies. The government doesn’t own bureaus, but it does protect your right to access your credit reports, dispute incorrect information, determine who can access your reports, and seek damages from violators thanks to the Fair Credit Reporting Act (FCRA)*.
Myth 8: Debit and Prepaid Cards Can Help Credit Reports and Scores
Making purchases with your debit card or a prepaid credit card won’t boost your credit score.
Paying cash also doesn’t help build your credit because these transactions generally aren’t reported to the credit bureaus, so there’s no way to know if you’re paying responsibly.
Myth 9: Paying Off a Collections Account and Other Debt Removes it From Your Credit Report
Unfortunately, paying off an overdue debt doesn’t remove it from your credit report or lower the impact of the late payment.
Typically, these activities can stay on your report for up to seven years. The impact of a negative item does lessen over time, especially if you’ve logged positive credit activities since then.
Myth 10: A Bad Credit Score Means You’ll Never Be Approved for Anything
You can still be approved by a lender if you have a low score, but it’s likely you’ll be subject to larger down payments, shorter repayment periods, and higher interest rates.
In general, the terms and conditions for someone with a lower credit score are worse than someone with a higher credit score.
You can reach out to your financial advisor for advice on raising your credit score.
Sources:
https://www.lexingtonlaw.com/credit/myths
https://www.lendingtree.com/blog
*https://www.lexingtonlaw.com/credit/what-is-the-fair-credit-reporting-act