Credit Score Myths and Facts You Need to Be Aware Of

 

What is a credit score?

A credit score is a numerical representation of a person’s creditworthiness. It is used by lenders and financial institutions to assess the risk of extending credit to a borrower. The score is based on a variety of factors, including payment history, outstanding debt, length of credit history, types of credit used, and new credit applications. A credit score typically ranges from 300 to 850, with higher scores indicating a greater likelihood of being able to repay debts on time. A good credit score can help you qualify for better loan terms and lower interest rates, while a poor credit score may make it more difficult to obtain credit or result in higher interest rates and fees.

Credit score facts

1. Credit score is not the same as your credit report

Your credit score and your credit report are two different things, although they are related. Your credit report is a detailed record of your credit history and includes information about your credit accounts, payment history, and public records, among other things. Lenders use your credit report to determine your creditworthiness, and it is the basis for your credit score.

Your credit score, on the other hand, is a numerical representation of your creditworthiness. It is calculated using information from your credit report, along with other factors like your income and employment history. There are several types of credit scores, but the most commonly used is the FICO score, which ranges from 300 to 850.

Learn more: Differences Between Credit Score and Credit Report

2. Credit scores are based on multiple factors

Credit scores are based on multiple factors, including your payment history, credit utilization, length of credit history, types of credit accounts, and new credit accounts.

• Payment history is one of the most important factors in determining your credit score, accounting for about 35% of your score. This includes whether you make your payments on time, the amount of missed or late payments, and how long ago any missed payments occurred.

• Credit utilization, or the amount of credit you are using relative to your credit limits, is another important factor, accounting for about 30% of your score. Using a high percentage of your available credit can indicate that you may be a higher risk borrower and can lower your credit score.

• The length of your credit history also plays a role in your credit score, accounting for about 15% of your score. Lenders like to see a long and consistent credit history, as it demonstrates your ability to manage credit over time.

• The types of credit accounts you have, like credit cards, loans, and mortgages, can also impact your credit score. Having a mix of different types of credit accounts can demonstrate that you can manage different types of credit responsibly.

• Finally, new credit accounts can impact your credit score, accounting for about 10% of your score. Opening multiple new credit accounts within a short period can indicate to lenders that you may be a higher risk borrower and can lower your credit score.

3. You can check your credit score for free

You can check your VantageScore any time using Credello’s new free credit monitoring tool as well as access to tools to help you get organized and be disciplined on your financial fitness journey.

Additionally, you are entitled to a free credit report from each of the three major credit bureaus once every 12 months. You can access your free credit reports through AnnualCreditReport.com, the only official website authorized by the federal government to provide free credit reports.

4. Monitoring your score can help you identify fraud

Monitoring your credit score can help you identify fraud and potential identity theft. One of the ways that identity thieves operate is by opening credit accounts in someone else’s name, using their personal information. By monitoring your credit score and credit report regularly, you can quickly spot any unauthorized credit activity and take steps to stop it before it causes significant damage to your credit and financial health.

Additionally, monitoring your credit score and credit report can help you identify any errors or inaccuracies in your credit report that may be negatively impacting your credit score. If you spot any errors, you can dispute them with the credit bureaus to have them corrected, which can help improve your credit score.

Learn more: What is Credit Monitoring?

5. Opening more credit cards affects your score

Opening more credit cards can affect your credit score, both positively and negatively. When you apply for a new credit card, the lender will typically perform a hard inquiry or hard pull on your credit report, which can lower your score by a few points. Additionally, opening too many new credit accounts within a short period of time can indicate to lenders that you may be a higher risk borrower and can result in a lower credit score.

Learn more: Do More Credit Cards Help Your Credit Score?

6. Even small unpaid balances can hurt scores

Even small unpaid balances can have a negative impact on your credit score. Your payment history is one of the most important factors that determine your credit score, accounting for 35% of your FICO credit score. This means that consistently paying your bills on time is critical to maintaining a good credit score.

When you have unpaid balances, even small ones, it can indicate to lenders that you may have difficulty managing your finances or that you are not taking your financial obligations seriously. This can result in a lower credit score and may make it more difficult to qualify for credit in the future.

7. Good credit scores do not guarantee approval

While having a good credit score is an important factor in getting approved for credit, it does not guarantee approval. Lenders look at many different factors when making credit decisions, including your income, employment history, debt-to-income ratio, and other financial information.

For example, even if you have a good credit score, you may not be approved for a loan if you have a high debt-to-income ratio, meaning you have a lot of debt relative to your income. Similarly, if you have a limited credit history or a history of missed payments, lenders may hesitate to approve you for credit, even if you have a good credit score.

Additionally, lenders have their own underwriting criteria and may have specific guidelines for the types of borrowers they are willing to work with. For example, some lenders may only work with borrowers who have a certain credit score range or income level.

Credit score myths

1. Checking your credit score will lower it

Checking your own credit score will not lower it. When you check your own credit score, it is considered a “soft inquiry” or “soft pull,” which does not impact your credit score.

Learn more: Does Checking Your Credit Score Lower It?

2. Your credit score will increase with your income

Your income is not a factor that is directly used to calculate your credit score. However, having a higher income can indirectly affect your credit score in a few ways. For example, if you have a higher income, you may be able to qualify for larger credit limits, which can improve your credit utilization ratio and potentially increase your credit score. Additionally, having a higher income may make it easier for you to make on-time payments and manage your debts effectively.

Learn more: Does Income Affect Credit Score?

3. Using debit cards can help you build a credit score

Debit cards do not directly impact your credit score because they are not a form of credit. Debit cards are linked to your checking account, which means you are only able to spend the funds you have available in that account. As a result, there is no credit being extended to you that can be used to build a credit history.

Learn more: Do Debit Cards Build Credit?

4. Closing old accounts can boost your credit score

Closing old accounts can actually have a negative impact on your credit score, particularly if those accounts have a long credit history or a high credit limit.

One of the factors that affect your credit score is your credit utilization. When you close an old account, you are reducing the amount of available credit, which can increase your credit utilization ratio and potentially lower your credit score.

Additionally, closing an old account can shorten your credit history, another factor affecting your credit score. A longer credit history generally reflects positively on your credit score, as it shows you have a history of responsibly managing credit.

5. Co-signing for credit will not affect your score

Co-signing for credit can potentially affect your credit score, both positively and negatively.

When you cosign for credit, you essentially agree to take responsibility for the debt if the primary borrower fails to make payments. This means that the debt will be reflected on your credit report and will factor into your credit utilization and overall debt-to-income ratio.

If the primary borrower makes timely payments, this can reflect positively on your credit score, as it shows that you are a responsible co-signer. However, if the primary borrower misses payments or defaults on the loan, this can negatively impact your credit score, as it indicates that you are unable to manage your debt effectively.

6. Negative information stays forever on your report

Negative information does not stay on your credit report forever; it typically has a limited lifespan and will eventually be removed.

Different types of negative information have different lifespans on your credit report. For example, late payments, collections, and charge-offs will typically stay on your credit report for seven years from the date of the delinquency. Bankruptcies can stay on your credit report for up to 10 years, while tax liens can stay on your report for up to 7 years after they are paid off.

Positive information, like on-time payments and a long credit history, can stay on your credit report indefinitely and may continue to benefit your credit score for many years.

7. Paying rent helps your credit score

There is a common myth that paying rent helps improve your credit score, but the truth is that rent payments typically do not have a direct impact on your credit score. While paying rent on time can demonstrate responsible financial behavior, it does not typically get reported to credit bureaus unless you fail to pay, and it goes into collections.

However, some newer credit scoring models incorporate rental payment history into their calculations. Actually Experian recently announced it will also be counting monthly rent payments towards consumers’ credit scores.These models are not yet widely used, but they may become more prevalent in the future.

8. There is only one universal credit score

Lenders and other organizations use not just one universal credit score but multiple credit scoring models to evaluate creditworthiness.

The most well-known credit scoring model is the FICO score, which ranges from 300 to 850 and is used by many lenders. However, there are also other credit scoring models, like VantageScore, which was created by the three major credit reporting agencies. Each lender or organization may use a slightly different credit scoring model or version, leading to different credit scores for the same individual. Additionally, some lenders may consider additional factors beyond credit scores, like income or employment history, when evaluating creditworthiness.

Related: What are the Types of Credit Scores?

9. Your credit score is affected by your spouse

There is a common myth that your credit score is automatically affected by your spouse’s credit score, but this is not true. Credit scores are based on an individual’s credit history and behavior, not their spouse’s.

However, if you and your spouse apply for joint credit, like a joint credit card or a mortgage, the lender will typically consider both your credit scores and credit reports in making their decision. In this case, if one spouse has a lower credit score, it could potentially impact the terms of the joint credit account, like the interest rate or credit limit.

In some states, community property laws may come into play when it comes to credit and debt. In community property states, any debts incurred during the marriage may be considered joint debts, regardless of who incurred them.

Related: Does Marriage Affect Your Credit Score?

10. Your age matters

Your age is not a factor that is directly considered when calculating your credit score, but factors associated with age can impact your credit score. For example, the length of your credit history can be an important factor in determining your credit score, and older individuals may have longer credit histories. Additionally, your income, employment status, and financial obligations may change as you age, which can also impact your credit score.

11. Your employer can see your credit score

While your credit report may contain information about your credit history, including your credit score, your employer is not permitted to see your credit score without your permission.

Employers are allowed to review your credit report, but only under certain circumstances, like if you are applying for a job that requires financial responsibility, like a job in banking or accounting. In these cases, employers may request a copy of your credit report to evaluate your financial background and determine whether you are a suitable candidate for the position. Your credit score will not be visible to your employer, even in these cases. Rather, they will only be able to see the information in your credit report, like your credit history, outstanding debts, and any missed payments or defaults.

It’s worth noting that some states have restrictions on how employers can use credit reports in their hiring decisions, and the use of credit reports in employment decisions is becoming increasingly controversial.

12. It’s difficult to improve your credit score

While improving your credit score may take some time and effort, it is generally not difficult to do so with the right strategies and a bit of patience.

There are several steps you can take to improve your credit score, including:

• Paying your bills on time: Payment history is the most important factor in your credit score, so making timely payments on all your bills is crucial.

• Reducing your credit utilization: Credit utilization refers to the amount of credit you are using compared to the total amount of credit available. A lower credit utilization ratio is generally better for your credit score, so trying to keep your balances low is a good idea.

• Checking your credit report for errors: Errors on your credit report can negatively impact your credit score, so it’s important to check your report regularly and dispute any errors you find.

• Avoiding new credit applications: Applying for new credit can result in a hard inquiry on your credit report, which can lower your score temporarily. Avoiding unnecessary credit applications is a good idea, especially if you’re already working to improve your score.

Related: How to Improve Your Credit Score?

13. Disputing your credit report will affect your score

Disputing errors on your credit report is a good way to ensure that your credit score is accurate and reflects your true credit history. When you dispute an error on your credit report, the credit bureau will investigate the error and make any necessary corrections. If the correction results in a change to your credit score, it will be updated accordingly.

Learn more: Can Disputing Credit Report Hurt Your Credit?

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