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There are endless misconceptions about consumer credit, despite more information being available about credit scores than ever before. Unfortunately, most of these misbeliefs are also quite damaging to credit scores. So we’ve put together the biggest credit myths and debunked them so that you can be better informed and able to improve your credit in order to achieve your financial goals.
1. If I have never used any credit, I must have a high credit score
You would think so, right? Well, that’s actually not the case. Lenders want to see that you are able to manage credit accounts responsibly. To receive a FICO credit score, your credit report needs to meet 3 criteria: at least 1 account open for 6 months or more, at least 1 account that has been reported to a credit bureau within the last 6 months and no sign that you have deceased. So basically you have to have an active credit account to have a credit score. But, this doesn’t mean that you need to have debt in order to build your credit. You can open a credit card and pay it off each month to start building a good payment history. Learn more strategies to start building your credit in this article.
2. Checking my credit score or credit reports will lower my credit score
This common credit myth is not true. If you check your credit report, it is known as a soft inquiry or soft pull, and this does not affect your credit score. Similarly, if you use a credit monitoring service to check your credit score, like Credit Karma, it requests the information on your behalf and is also considered a soft inquiry. A hard inquiry, on the other hand, is when a lender reviews a consumer’s credit report. Hard inquiries can cause your credit score to go down slightly for about a year.
3. There is one credit score that all lenders use
According to Experian, lenders use many different credit scoring models to gauge someone’s credit risk. A generic credit score may be used to determine general credit risk, but custom credit scores are used to predict specific credit risk, such as for an auto loan or retail card.
4. I only need to check my credit reports if I’m applying for a new line of credit
We recommend checking your credit reports from all 3 bureaus on an annual basis. This is beneficial because you can monitor what is being reported to the bureaus and dispute any inaccurate information, which unfortunately happens more than people think. For more info, read our article How Can I Get My Free Annual Credit Reports.
5. All three credit bureaus have the same credit reports
Your credit reports from the 3 bureaus are most likely slightly different. Not all lenders report to all 3 credit bureaus and the accounts might not be updated on the same days. This is why it’s important to check all 3 credit reports and if you need to file a dispute you should do so with each credit bureau that has the inaccurate information on their report.
6. Paying off a delinquent account will raise my credit score
Collection accounts, late payments and bankruptcies stay on your credit report for up to 7 years. Over time the negative impact of a delinquent account on your credit score fades. However, paying off a delinquent account won’t remove it from your credit reports and raise your credit score like many people think. Instead, it will be marked as “paid,” which is a good indicator to a lender but it will not actually improve your credit score. Out of all these credit myths, most people probably wish this one was true!
7. If my credit score is low, it will always stay low
This is definitely not true. You have the power to improve your credit score by managing your credit more responsibly. Making credit payments on time and paying off your credit card balances in full each month will go a long way in improving your credit. To learn other ways you can increase your credit score, check out our article 5 Easy Tips To Raise Your Credit Score.
You can get your FICO credit score for free from Experian. It offers access to your Experian credit report and includes credit monitoring and alerts. Experian Boost also enables you to improve your credit score by adding payments that are left out of your credit history, like cell phone, utility bills and even Netflix, to your Experian credit report. The best part is that it’s free!
8. I should close an old credit card if I no longer use it
Length of credit history accounts for 15% of your FICO credit score. This means that even if you don’t use an old credit card, it is contributing to the average length of your credit history. Try to use it every once in a while to keep it open and remember to pay it off each month. To learn more about how your credit score is calculated, read 5 Factors That Determine Your Credit Score.
9. My credit score is impacted by how much money I earn or have in the bank
Information about income, education level, savings or checking accounts, and investments are not included in credit reports. Moreover, the Equal Credit Opportunity Act prohibits credit scoring systems from using race, gender, marital status, national origin or religion as factors.
10. Missing one payment won’t hurt my credit score
Payment history accounts for 35% of your FICO credit score and a lender can report a late payment to credit bureaus 30 days after the due date. According to Experian, “a late payment will lead to a more severe point drop if you currently have an excellent credit score rather than a poor or fair score.” Like other delinquent accounts, a late payment can stay on your credit reports for up to 7 years, but the negative impact of it decreases over time. For credit cards, we recommend setting up automatic payments for the minimum balance and a recurring calendar reminder so you can pay off as much of your balance as possible.
Credit Myths Debunked
Many people have heard of these credit myths and will be surprised when they find out the truth. Hopefully after reading this you have a better understanding of your credit and you feel more empowered to improve your credit score. Whether your financial goals are buying a car or a house, having a high credit score will help you achieve them and will help you save money in the process.
How many of these credit myths did you think were true? Let us know in the comments!
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com