10 Credit Score Myths You Need to Reconsider ￼
There is so much misinformation when it comes to credit scores. This is surprising, considering how common credit cards have become. A credit score is used by lenders to determine your likelihood of paying them back. Specific criteria are used to assess a borrower’s general risk. This includes the amount of debt a borrower already has and payment history.
FICO and other credit scoring companies don’t hide the type of information that they use to calculate credit scores. However, there is still a lot of speculation.
So take a look at some of the most common myths about credit scores.
Large Balances Are Good for Your Credit Score
Some myths are so widespread and believable because there is some truth in them. And this is one of those myths. Using credit can help boost your credit score.
Carrying a large balance, however, could hurt your credit score.
Your credit card debt accounts for 30% of your credit score. This is according to FICO. So high credit card balances are not good for your credit score. Experian recommends using less than 30% of the total available credit and the individual card limit. If you go above that level, your score will start going down.
Your Credit Score Increases When Your Income Increases
It is easy to believe this myth because most wealthy people have high credit scores. But your income doesn’t affect your credit score.
According to FICO, the five components that count include credit mix, new credit, length of credit history, amounts owed and payment history.
Income is not used in calculating your credit score. It is just that people with high incomes tend to have enough money to pay off their debt. This boosts their credit score.
If You Get Married You Will Have a Joint Credit Score
Couples can choose to combine their finances when they get married. If you are not sure about merging your score with that of your partner, you have nothing to worry about. Joint credit scores don’t exist.
Everyone gets to keep their individual credit history. Any joint accounts that you open with your partner will appear on your report. But the credit scores will remain separate.
Paying Off Your Auto Loan Will Boost Your Credit Score
Having less debt helps your credit score. So this means that if you pay off your auto loan, your score will improve, right? Well, wrong.
In fact, it is possible that your score may go down temporarily if you pay off the car loan. This is because it will become a closed account on your report. Credit mix is used to calculate your score. So if an installment loan is removed from the report, your credit score may drop. But according to Experian, this will probably just be short-term.
Checking Your Score May Cause It to Drop
Just as with many other myths, there’s some truth to this one. When you apply for credit, the potential borrower will most likely run a credit check. This can make your score drop by a few points. But if you check the score yourself, it will not be affected.
Applying for credit triggers a “hard inquiry” and it can hurt your score. A lender conducting a routine review or you checking your own score is a “soft inquiry” which will not affect your score.
Using Your Debit Card Could Boost Your Credit Score
Responsible debit card usage signifies financial maturity. But even though it is a sound financial habit, it doesn’t affect your credit score in any way.
Using your debit card is similar to using cash. Managing your cash successfully doesn’t exactly prove to lenders that you will pay back debt responsibly. Issuers of debit cards don’t report your usage to credit agencies. So it doesn’t count.
Taking Out a Mortgage Can Hurt Your Score
When you first apply for the mortgage loan, you can expect your score to drop by a few points because of the inquiry. You will also have a new account on your report with no payment history and a large balance. This, again, may affect your score negatively.
But with time, the mortgage will start helping your score as you continue paying on time. You will have a not-so-new account with a successful payment history. This is good for your credit score.
The Credit Score Is Not That Important in the Real World
Some people love boasting about their excellent credit scores like it is a badge of honor.
But having a great credit score doesn’t just earn you bragging rights in the real world—it is far more useful than that. Having a high credit score affords you the benefit of low interest rates on loans. This includes all kinds of loans—car loans, personal loans, mortgage loans, credit card loans, etc.
Some lenders won’t even give you a loan if you don’t have a top-tier credit score.
With an excellent credit score you will enjoy flexibility and low-cost financing.
Applying for Many Credit Cards at Once Isn’t Bad for Your Credit Score
This is a myth rooted in truth.
Whenever you apply for a new credit card, your score drops by a few points because it is a hard inquiry. If you are applying for too many cards, your score may drop even more.
Most people believe this myth because making multiple applications for some loans (like car loans and mortgages) in a short period of time is considered a single inquiry by credit scoring agencies. It is natural for anyone buying a car or home to shop around until they get the best deal since it is a large purchase.
This grouping is not available for credit card applications because they are unsecured loan requests.
Closing Unused Credit Cards Will Boost Your Score
This is not true. Closing a card reduces your available credit and this will, most likely, knock a few points off your score. It gets even worse for someone with outstanding debt on other credit cards. A reduction in available credit increases credit utilization which also hurts your score.
Another thing, closing a card means that you won’t benefit from the successful payment history or age of that card on your report. The effect won’t be immediate because closed accounts stay on your report for 10 years. But it will eventually disappear and hurt your score.