Credit Score Myths

    The myths surrounding credit scores are plentiful and varied.  We asked people to offer up some of the myths they’ve heard, and then we scoured the internet for more.  Every one that we learned about is listed below (there’s a lot), along with an explanation of why it isn’t true.

     

    Myths Relating Especially to Your Score:

    You can easily “fix” your credit score through a credit repair company.

    Companies which offer to “reestablish” your credit, or remove accurate information that is negative, are only promising things that can’t really be done.  They cannot remove information that is correct, and you could just as easily dispute any incorrect data yourself with the credit bureaus.  The most beneficial reason for enlisting the services of a credit repair company would be to get help coming up with a plan to rebuild your credit.  Thankfully, you could type your queries into Bing or Google and get plenty of solid advice from trusted experts for free, if you’d rather take a more hands-on approach.

    Increasing your score drastically, and fast, is achievable by paying off your debt.

    There is no guaranteed amount of points that can be gained from any action that will affect your credit report, since your credit score is calculated via a complicated model.  Some credit reporting agencies, like Experian, have a score simulator that takes many options into account, but even that is not an exact science.  Your best option is to pay off as much as possible, on time, and don’t expect to see drastic improvements immediately.

    Using cash, or check and debit cards, will help improve your credit score.

    Credit cards can be an advantageous tool, but check cards and debit cards bear no effect on your credit report or score.  Debit cards are simply plastic access to your bank accounts, which are not reported on in any way to credit bureaus, unless, of course, you don’t pay the bank money that is owed to them.  Similarly, using primarily cash will likely hurt your score much more than improve it.  Without credit, you won’t have a payment history, or any credit history for that matter, and your credit portfolio will not be very diverse.  An auto or home loan could help balance out not using credit cards, but, unless you know that you will only pay cash in full for every purchase the rest of your life, establishing a positive credit history is very important.

    Checking your credit report lowers your credit score.

    Checking your own credit report or score should have no impact on your score.  Inquiries about your credit fall under two categories: hard and soft.  Soft inquiries do not impact your score and include things like you checking your own information or inquiries made for those pre-approval offers you get in the mail but never granted permission for.  Hard inquiries occur when you authorize a lender or creditor to check your credit information, such as for an auto loan.  Since each hard inquiry could reduce your score anywhere from 5 to 20 points, multiple hard inquiries made within a short period of time are often treated as one to reduce the impact of consumers shopping around for the best rates.  It is a great idea to review your credit report at least annually, but preferably quarterly, to be more fully aware of the activity surrounding your credit information.

    You can’t get a home loan with a subpar credit score, and there’s no coming back from it.

    A low credit score can seriously hamper your ability to get a low interest rate, but you could still qualify for a home loan.  While many lenders do prefer a score over 700, some well-known organizations, like the FHA, offer mortgages for buyers with a score as low as the 500s.  These opportunities, however, will almost always come with downpayment requirements (sometimes as much as 10%) and higher interest rates.  Get a professional lender to assist, if necessary, but run the numbers to see if postponing for a few months while you work to improve your credit score is worth the wait.  Sticking to good financial habits during that time might result in more of an improvement than you expect, depending on your situation.

    A perfect credit score is impossible to achieve.

    It is commonly reported that about one percent of the US population, give or take depending on the year, have a perfect FICO score of 850.  That would have been just over 3 million people in 2017 – certainly not a number representing impossible.  It generally takes decades of credit history to achieve a perfect score, regardless of the scoring model, and those lucky few have used a good bit of strategy to make the numbers work in their favor (even after financial issues in some cases).  Several of them have shared their strategy with the world at one point, so a quick Google search would yield some tips if such an achievement is your heart’s desire.  However, experts say that a score over 760 would provide the same caliber of benefits, just without the bragging rights, of course.

    All credit bureaus report the same score, and it will either be “good” or “bad”.

    Every credit bureau will likely have slightly different information on their version of your credit report, and, as a result, will likely have a different score for you.  Several reasons can explain these differences: each credit bureau uses a different formula to calculate your score, credit reporting agencies don’t necessarily update their reports at the same time, and lenders and other creditors don’t always report to all three agencies.  If a credit bureau labels your score on a scale from excellent to poor, this is only a reflection of the typical conclusions that are formed by creditors and should only be used to add perspective.  Credit bureaus do not actually determine whether or not someone will lend to you; they simply provide the score so that the creditor can evaluate the risk of doing business with you based on their individual requirements.

    Every lender uses the same score to determine how risky you are.

    While most lenders will use your FICO score, even that can vary.  According to an article from The Motley Fool (a leading investment knowledge company), there are 28 possible ways to calculate a FICO score.  Another popular option among lenders is the VantageScore.  Some industries and companies have their own unique formula for calculating your score and may give a smaller or larger weight to certain factors, based on what the company or industry thinks is most important.

     

    Myths Relating Specifically to Debt and Payments:

    If you don’t think you should have to pay the bill, then you aren’t responsible for it.

    Rather than not paying the bill at all, the best course of action would be to resolve the issue by discussing it with the creditor directly.  If left unresolved, the delinquent account will likely still go to a collection agency, and it will still have a negative impact on your credit report.  If the issue cannot be resolved with the creditor, you may be able to work with the credit reporting agencies to have the negative marks removed.

    Debt is debt, regardless of type.

    A student loan or mortgage does not have the same impact that a maxed out credit card does.  Loans for big life steps, like education, business, homes, and automobiles are seen as responsible, as long as you pay them on time.  They don’t have much of a negative impact at all, unless they make your debt to income ratio too high.  Other debts, like payday loans, high credit cards balances, past due medical bills, etc. typically demonstrate poor financial habits, and that type of debt definitely has a negative impact and will lower your score.

    Late payments only affect your score for certain debts.

    While some types of debt have less of an impact on your credit score than others, all late payments, regardless of account type, can be reported to a credit bureau and reduce your score.  Some that you may not think about include rent to a landlord, storage unit fees, restaurant tabs, library fines, lines of credit, retail shops, etc.

    You can hide debt by moving around balances.

    Moving around your balances, especially via credit cards, may be able to help you pay debt off sooner, but it is still there.  Some credit cards offer zero percent interest on balance transfers, which could be very beneficial to avoid paying hundreds, or even thousands, of dollars in interest fees.  But at the end of the day, although some debt doesn’t negatively impact your credit score, it will still be visible on your report.

    Co-signing does not mean that you are responsible for the debt.

    Contrary to popular belief, partnering with someone on their debt does make you responsible for it should anything go awry with the other person’s ability to pay.  You are committing to a legally binding agreement and, as a result, will absolutely be held accountable.  There are ways to get out of this agreement, such as if the other person refinances without using your information or by speaking directly with the creditor to remove your name, but the latter is less likely to produce the desirable result.  Many people co-sign for friends, family members, or spouses, and it is a great way to help someone out.  Just be sure that you know what you are getting into, and know that your credit report will definitely be affected if payments aren’t made on time.

    Bankruptcy is a solid way to escape a mountain of debt.

    While many people have used bankruptcy as a means to escape or significantly reduce debt, it should absolutely be a last resort.  Some forms of bankruptcy are less detrimental to your credit than others, but all of them will stay on your credit report for 10 years.  Bankruptcy is a huge red flag for many lenders, and it usually takes several years before you can even be considered for loans like a mortgage.  If at all possible, the best help to seek would be that of a credit counselor or advisor who can work with you to formulate a stable financial plan that does not involve bankruptcy.

    Paying off a balance will remove the item from your credit report.

    There is some truth to this, but not in the way that many people think.  Credit reports are a statement of your credit history as a whole, so the activity surrounding your various accounts will stick around for a few years.  Specifically seven to ten years, depending on the type of account; serious negatives, like bankruptcy and foreclosure, tend to take the longest to drop away.  Keep in mind, paying off debt will reflect positively on your credit report.  Your score may not improve by much, or at all, but your willingness to settle those balances will reflect your attractiveness to creditors in a more positive light.

     

    Myths Relating to Marriage:

    Couples have a joint credit score and joint credit report.

    At no point will your credit score or report ever not be yours, and yours alone.  A couple may have a joint banking account, or cosign for loans together, but your credit score and report are tied to your social security number and will still only reflect the financial decisions you personally have made.  Loans for which both spouses are responsible will show up on both credit reports, and the financial state of those loans will effect both reports, but the reports are still separate by all accounts.

    One spouse’s good credit score will counteract the other spouse’s poor one, so no worries.

    Theoretically, this might make sense – the spouse with good credit could cosign for the spouse with poor credit to help get credit cards, a mortgage loan, etc.  However, the opposite could happen, and the whole application might be rejected due to that poor credit score.  Additionally, if the application is approved, it might come with high interest rates or other extra fees.  If one spouse has poor credit, the best course of action is almost always to work on improving it with minimum risk to the better score.

    Divorce has no effect on your credit score.

    With accounts that are in the name of both parties, the account must either be closed completely, or the appropriate paperwork must be filed.  Accounts that are closed completely will definitely have a negative effect on both credit scores, as removing an account adjusts multiple factors that are used to calculate a score.  To avoid closing an account, a divorce decree must be filed to update the contract and designate who will be responsible for the account going forward.  If such paperwork is not handled, and the person who is still using the account begins to abuse it, both credit reports will reflect the damages.

     

    Myths Relating to Individual Characteristics and Lifestyles:

    Credit has no effect on a potential employee getting hired.

    Many employers include a credit check as part of their hiring process.  Such checks do not display discriminatory data that employers need not consider, such as age, your actual score, etc.  They will, however, display enough information to give the employer an idea of whether or not you are financially responsible and address debts.

    The amount in your checking or savings account influences your credit score.

    The only time that a bank account could effect your credit score is if you owe the bank money, and they turn the delinquent balance over to a collection agency.  The amount of money in your bank accounts could, however, act alongside your credit score to influence whether or not you are approved for a mortgage.

    Your credit score is influenced by demographics.

    Since credit scores are a reflection of credit reports, which do not include demographic, income, professional, disability, veteran status, sexual orientation, religion, nationality, or race information, this is simply not true.

    Your value as a person is influenced by you credit score.

    The only purpose of a credit score is to help lenders and creditors determine how risky it would be for them to invest in you, based on the probability that you would default on the account.  A truly lovely person could have an abysmal credit score, and someone with a personality akin to the Joker from Batman could have a phenomenal credit score.  Therefore, your credit score holds no worth in valuing you as a person.

    Earning a degree and/or getting a better job will directly impact your credit score.

    Your salary and education may indirectly have an effect on your ability to pay bills in full and on time, but neither one effects whether or not you actually pay them.  Theoretically, a person with no job and little prospects could pay all of their bills on time and have an excellent credit score, but a highly-paid and sought-after CEO could have terrible financial habits and a considerably lower score.  Age, religion, gender, political party, government assistance, job status, salary, and other such factors have no impact on your score.

     

    Myths Relating to the Country/Government:

    Americans’ current financial issues are because of credit.

    When a person gets into financial trouble with creditors, it is due to that person’s money usage decisions, not the existence of credit.  Many people, across many walks of life, utilize credit in a positive way and have never had issues.  Developing positive spending and saving habits over time, even while making use of credit offerings, will prove that credit doesn’t have to be the enemy.

    Credit bureaus are owned by the government.

    While there are government-set rules in place for how credit bureaus may operate, they are not owned by the government.  TransUnion, Equifax, and Experian are all publicly traded companies with global operations, none of which are managed by any government entities.

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