20 Credit Myths You Shouldn’t Fall For
December 21, 2019
It's hard to tell the difference between a credit myth and a credit fact. Will your credit score take a hit if you open a new account? Does a potential employer check your credit score? There are many claims roaming around and it’s difficult to know what’s true and what’s not.
In this post, we debunk the most common myths about credit. You'll learn what's a myth and what's not, as well as real methods for potentially boosting your credit.
Here are the top 20 credit myths that you should know about.
Myth 1: There’s Only One Credit Score
Depending on several factors—like the scoring model used and the type of credit you’re applying for—you could actually have many credit scores. In fact, the credit score that you check might differ from the one that a lender checks.
FICO® has several ways to calculate credit scores, 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 (i.e. a credit card vs. an auto loan). You won’t know exactly which scoring model is used, as there are hundreds of variations that could affect your score.
In general, your credit scores—however they’re calculated—will be relatively close to each other. They may differ somewhat, but usually not by more than 50 points (unless there’s an error on one of your reports). To ensure your credit score is as high as possible, keep your credit report free of errors, negative marks and excessive debt.
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Myth 2: Checking Your Own Credit Report Will Hurt Your Score
Contrary to popular belief, checking your credit report doesn’t impact your credit at all. Keeping tabs on your credit report is vital for noticing errors and fraudulent activity.
When you check your own report, it’s called a soft inquiry. Soft inquiries don’t show up on your report or impact your score.
Hard inquiries, on the other hand, can impact your score. This is when a potential lender or mortgage dealer checks your report. Hard inquiries aren’t bad—in fact, they’re often necessary. That being said, having too many happen close together—such as five within one month—signals to lenders that you might be an irresponsible borrower, and your score could be impacted.
Myth 3: All Three Credit Reports Have the Same Information
The three main credit bureaus—Equifax, Experian and TransUnion—all receive and report different information.
Lenders and creditors aren’t obligated to report to all of them or to any of them at all. For example, your utility company might only report to two of the credit bureaus.
Each credit bureau has its own algorithm and system for determining your score. That’s why your credit report and scores can differ across the bureaus. It’s best to keep your reports error-free and your payments on time to ensure that no matter which credit report is pulled, you’ll have your best financial foot forward.
Myth 4: The Government Owns the Credit Bureaus
The credit bureaus are independent, commercial companies. It’s easy to think of the credit bureaus as being official government agencies, but this isn’t actually the case.
The government doesn't own the bureaus, but it does protect your rights 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 5: Education Level Affects a Person’s Credit Score
Demographic information doesn’t influence credit scores.
Whether you hold a high school diploma or an Ivy League college degree, neither will impact your credit score. Lenders are interested in your history of paying bills on time and the likelihood you’ll repay their loan.
Myth 6: 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. Whether you make $30,000 or $100,000, your credit score can be just as high or low depending on factors like your repayment history, credit utilization and the average age of your credit.
Myth 7: Employers Can Check Credit Scores
Some employers—such as the government or financial institutions—check credit reports upon hire, but they can’t check credit scores. According to the rights accorded to you by the FCRA (which we mentioned above), you have to willingly sign a waiver to permit your employer to check your credit report.
Myth 8: Spouses Have a Joint Credit Report
There’s no such thing as a joint credit report. Your credit history is attached individually to your identity. Even if you file joint taxes with your spouse or have joint credit cards, the information is reported separately on each of your own credit reports.
If you opened a loan or credit card with a spouse, make sure payments are made on time, as the information is still likely reported on both your credit histories.
Myth 9: A Divorce Does Not Impact Credit Scores
Filing for divorce itself doesn’t impact your credit score.
Late and missed payments that happen as a result, however, can negatively affect your score. In many cases, any debt you’ve acquired during the marriage is the responsibility of both partners.
You should double-check with the laws in your state and consult with an attorney when going through this process. Even if your spouse takes ownership of a joint account, be aware if your name is still on it. If it is, your credit score might still be attached to any late or missed payments.
Myth 10: 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 a rent reporting service.
Keep in mind that 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 11: 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, there’s no way for lenders to know if you're paying responsibly.
Myth 12: 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 good news is that the impact of a negative item does lessen over time, especially if you’ve logged positive credit activities since then.
Myth 13: Closing Accounts That I Don’t Use Will Help My Score
Closing an account you don’t use (like a student credit card after graduating) doesn’t boost your credit score. In fact, it usually lowers it.
Lenders look at the age of your credit (how long you stay with lenders). Closing an account lessens the average age of the accounts you have open.
Closing an account also increases your credit utilization—another factor that impacts your credit score. Your credit utilization rate is how much credit you’re using, compared to how much credit you have. Closing an account with a credit limit of $5,000, for example, lowers the amount of your total available credit and increases your credit utilization. A high credit utilization rate can negatively impact your credit score.
Myth 14: Bankruptcy Gives You a New Start
While filing for bankruptcy can help if you’re in a severe situation, it should be your absolute last resort.
Having bankruptcy in your history is a huge negative mark that stays on your credit report for up to a decade. If you’re in dire need of debt relief, consult a financial advisor or lawyer before choosing bankruptcy.
Myth 15: Applying for New Credit Will Hurt Your Credit Score
Unfortunately, this isn’t a myth. As mentioned above having too many hard inquiries can have a negative impact on your credit report, and hard inquiries happen every time you apply for a new credit card or loan.
You can mitigate the impact by applying for new lines of credit around the same time, as the credit bureaus typically assume you’re shopping around for rates. That being said, you don’t want to apply for too much new credit at once—lenders might worry about your ability to repay them.
Myth 16: Paying Off Your Credit Cards Each Month Hurts Your Score
Paying off your credit card balance each billing period can improve your score, and shows lenders that you're a responsible borrower.
It’s one of the best ways to boost your creditworthiness and lower your credit utilization rate. Your credit card issuer may increase your credit limit if you make on time payments in full, which in turn can lower your credit utilization and boost your credit score.
Myth 17: Your Credit Score Will Be Lower if You Have a Lot of Debt
The size of your debt doesn’t impact your score, and your debt to income ratio doesn’t directly affect your credit score either. For that matter, not having any debt doesn’t necessarily mean you have a good score. For example, you could have no debt because you have no credit history.
Not all debts are the same. A 30-year mortgage, for example, is a long-term investment. On the other hand, a credit card bill is meant to be paid off sooner. The size of your debt and its impact on your credit are relative to your situation.
Myth 18: A Bad Credit Score Means You’ll Never Be Approved for Anything
You can still be approved by a lender even 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.
Myth 19: It Takes a Long Time for a Credit Score to Go Bad
Missing a payment or having your account go to collections can drastically drop your score. This is one of the most dangerous credit myths out there, as credit scores can take a hit quickly.
In general, different types of negative marks carry different levels of severity on your score. The most negative marks, such as debt settlement, can stay on your credit report for seven years.
Keep in mind that a credit score takes a bigger hit if you’ve previously had a high score.
Myth 20: Credit Can Never Be Rebuilt and a Bad Credit Score Lasts Forever
The good news is that your credit can improve over time.
One possible way to work on your credit profile is to dispute inaccuracies. Many times there are errors on your report that harm you, and you might not even know they're there. You can work to drop these by making a dispute.
Thanks to the FCRA, you have the right to dispute errors found in your reports. When you dispute errors, the bureaus must investigate and respond within 30 to 45 days.
What To Do Next Now That You’ve Debunked the Myths
Now that you know what can actually hurt or improve your credit score, you can take a more proactive approach to how you manage your credit.
Start by taking a look at your credit report—you can get a free one here—and see if you find any errors, inaccuracies, things that shouldn’t be there or any fraudulent activity.
If you need additional professional help, you can get in contact with a credit repair service. A professional credit repair organization knows what to look for and how to help you work for the highest credit score possible. Call the credit repair consultants at Lexington Law today for a free consultation.