Have you received conflicting advice about how to achieve and maintain excellent credit? The persistent myths that surround credit scores and reports can lead to confusion and bad advice. Here are a few examples of credit myths that refuse to die.
1. You can improve your credit score by closing unused credit cards – Closing credit cards that you rarely use can actually decrease your credit score because they raise your credit utilization (how much credit you use versus how much you have available). If you use over 20% to 30% of your credit, it can start to affect your score — and climbing toward your maximum credit limit is definitely a red flag to creditors.
If you want to close accounts, minimize the effect by closing newer accounts and accounts with lower credit limits. Older accounts in good standing show long-term responsibility and lower risk.
2. Your credit score will drop any time you apply for credit – Credit scores can drop when a potential lender or creditor requests a "hard" credit pull, meaning that your full report is supplied. A "soft" credit pull is a shortened version that is used for preliminary steps like pre-approvals and interest rate estimates. Pulling your own credit report also counts as a soft pull.
Even a hard pull has limited effect on your credit score, dropping it by only a few points. Multiple pulls in a short period of time for the same purpose (such as comparing mortgage options) are usually considered one hard pull.
3. A credit report is the same thing as a credit score – A credit score is just that — a single score that rates your relative creditworthiness. That score is a summary of your credit report, which contains more detailed information about all of your credit and loan accounts.
While most people think of the FICO credit score, there are several different types of credit score. On top of that, you probably have more than one FICO score. Each one of the three major credit bureaus (Experian, Equifax, and TransUnion) will issue a score, and the account information they all receive on you may not be the same. As a result, your scores from each bureau may be different. It is important to check all three credit reports to look for erroneous information.
4. Your income affects your credit score – You can have a great credit score with a very low income, and you can have a lousy credit score with a high income. The important factor is how you manage whatever money you have. Do you pay your bills on time and manage the credit you do use responsibly? Do you spend within your means? That's what creditors are looking for.
5. You have never missed a payment, therefore you have a good credit score – Certainly having an excellent payment record is an important part of maintaining a good credit score, but it is only one factor. Your payment history accounts for only 35% of your credit score. The amount that you owe makes up 30%. The length of your credit history is 15% of the score, while new credit accounts and the type of credit you use account for 10% each.
If you don't check your credit report, there is a possibility that your payment record has an erroneous entry that you do not know about. It's important to check your credit score for verification.
6. A poor credit score can cost you a job – Employers generally cannot access your credit score. They can, however, review your credit report with your permission (unless you live in one of the eight states that apply some restrictions to employer credit checks).
It's important to separate fact from fiction when it comes to credit. Don't let myths like these examples lead you astray. Use multiple sources to verify proper credit practices and weed out erroneous information, and soon you will be a fully qualified credit MythBuster.
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