10 Myths About Your Credit Score Debunked

Your Credit Score is No Mystery

Sometimes it can seem like credit scores come from a black box, but the reality is that is not the case. Here are 10 common credit score myths that we’ve debunked in order to help you better understand your credit score and how & why it changes.

Myth 1: Spending more will increase my “activity” or “use” which will then increase my credit score.

While it is true that the right level of spending will increase your credit score, too much spending can harm your credit score. What is the right level of spending on a credit card? Ideally, you should spend only what you can afford to pay back each month and no more than 30% of your available credit limit. An ideal credit utilization rate per credit card is 30% or less. Any amount of spending on a card above that limit will negatively impact your credit rating. If you routinely exceed that limit on your credit card, you should consider spreading your balance across more than one card, while limiting your spending to the amount you can afford to repay each month.

Myth 2: Carrying a balance on your card will improve my credit score.

You don’t need to carry a monthly credit card balance to improve your credit score. You can pay off your credit card balances every month and positively affect your credit history.

Myth 3: Credit cards will cost me extra money by charging high interest rates and fees.

Credit card issuers make money by charging the merchant a small fee per transaction. They may also make money by charging interest to cardholders who do not pay their balance every month, fees for late payments, or annual fees for membership. If you are a cardholder that pays your balance every month on time you will avoid paying any interest or fees.   If you also choose a credit card without an annual fee you can enjoy the benefits of card membership entirely without cost.

Myth 4: Any inquiry into my credit report will lower my score.

There are two types of credit inquiries: a “hard inquiry” and a “soft inquiry”. If a lender or credit card company checks your credit report it is considered a “hard inquiry” that can have a negative impact on your score. When you check your own credit report (known as a consumer disclosure inquiry), however, this is considered a “soft inquiry” and does not impact your score. In fact, you can check your own credit as often as you like without any impact to your credit score. Other types of soft inquiries that do not affect your credit report are:

• Employment inquiries made by employers
• Promotional inquiries made by lenders in order to make a “preapproved” credit offer
• Account review inquiries made by lenders to review an existing account

Myth 5: You are entitled to one free credit report and score every year.

The law requires each of the major credit-reporting agencies, Equifax, Experian, and Transunion, to provide one free credit report per year. The credit report, however, does not necessarily include your three digit credit score. Your credit score is a number between 300-850 that estimates your creditworthiness by taking into account the details on your credit report such as length of credit history, amount owed, payment history, number of credit inquiries, collections, and any new credit.

Myth 6: Your age and income affect your credit score.

Although the longer your credit history is, the better [the length of your credit history accounts for 15% of your credit score], your age is not a factor in your credit score calculation. Similarly, although those with higher incomes can better pay-off their balances, income is not a factor in your credit score calculation.   In fact, a 25-year old with a short credit history and modest income may in fact have a better credit score than a 40-year old with a higher income and poor record of repaying debts and other bills.

Myth 7: If you don’t plan to buy a car or a house your credit history doesn’t matter.

Whether you are applying for a job, renting an apartment, purchasing a cell phone, or signing up for internet service, your credit history will be important. Landlords, cell phone carriers, and utility companies want to make sure you are responsible and pay your bills on time. Likewise potential employers want to make sure you are responsible and can be trusted with company finances.

Myth 8: There is a minimum credit score you need to apply for a loan, credit card, or mortgage.

There is no minimum credit score required to apply for most loans or credit cards. However, the lower your score, the less likely you are to be approved and the less likely you are to receive favorable rates. To increase your chances of approval and to get the best rates, you may want to improve your credit before applying.

Note: If you are applying for a mortgage, some mortgage servicers do have credit score guidelines. For example, FHA mortgage loans require a minimum credit score of 580 or higher with a 3.5% down payment. If you have a credit score below 580, you may still qualify for a FHA loan, but there are additional requirements and a 10% down payment is required. See FHA’s site for more information.

Myth 9: Closing an unused credit card improves your credit score.

Any change to a credit report can affect your credit score. Closing an account lowers the number of open accounts, but also decreases the amount of available credit. That results in a higher credit utilization rate or balance-to-limit ratio, which can actually lower your credit score.

Myth 10: Settling my delinquent credit accounts for less than the full amount can give my credit report a fresh start.

Failing to repay a debt in full will negatively impact your credit. However, the effect of settling a debt for less is still less than the negative effect of not paying a debt at all or declaring bankruptcy.

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