Let's face it, credit scores can be a mystery, and there's a lot of misinformation out there. While it is important to have good credit, you can't believe everything you hear – because the wrong step, even with good intentions, could send your credit in the wrong direction. Here are just a handful of the myths that I've heard from consumers about credit scores.
Myth 1: I believe I have good credit.
FACT: This is always a doozy, since so many people tell me all the time they "have good credit." Believing and knowing are not the same thing, and you shouldn't just assume your credit score is OK. Also, just because you had good credit five years ago doesn't mean you do now. Make sure to get copies of your free annual credit report from all three major credit reporting agencies every year, review the report and also periodically check your credit scores.
Myth 2: Closing a lot of credit cards will improve my credit score.
FACT: You'd think having a ton of credit cards would have a negative impact on your credit score and closing them would raise it. Unfortunately, it doesn't work that way. One of the major factors of your credit score is your debt-to-credit ratio, and closing too many cards at once can drastically change your ratio, which can cause your score to drop. For example: You have $5,000 in debt and $20,000 in available credit between your credit cards. Closing several of those cards would cause your available credit to drop to $10,000, putting a huge dent in your debt-to-credit ratio. Also, the closed account will drop off your credit reports in about 10 years, and from then on you'll no longer benefit from the age of that account, nor its positive payment history – which are also factors in your score.
My advice? If you really do feel the need to close your credit cards, pay off your balances and stash away the cards so you aren't tempted to use them. Close one every few months and monitor your credit reports and credit scores for the impact. Remember, even if you're not using a card, you should make sure you look at your statements to check for fraudulent activity.
Myth 3: Checking my credit report or credit score will reduce my score.
FACT: So many of my clients have no idea what their credit score is because they thought checking it would hurt it. Looking at your own credit report or score isn't like sneaking a peek at your notes during a test, you're allowed to be in the know. While it's true that if a lender checks your credit report or credit score, it results in a "hard inquiry," which causes a small, temporary drop in your credit score. However, when you check your own, it's called a "soft inquiry," and it has no effect on your score. You can get two of your credit scores for free every month on Credit.com.
Myth 4: My income affects my credit score.
FACT: I've had a surprising number of people mention that their low income has damaged their credit. The amount of money you make can only affect your credit score if your income affects your ability to pay your bills. Your income itself, however, is not listed on your credit reports, nor is it a factor in your score – so it has zero impact on your credit score.
Myth 5: I don't have to worry about my credit score because my significant other has a good score.
FACT: Do you not have to worry about your health because your partner is in good health? This is a terrible motto to live by. Your spouses' good credit score is not a shield you can both hide behind. And contrary to what some may think, credit scores only reflect an individual's credit – so your spouse's good credit is not counted as yours. And if you take out a mortgage together, for example, both spouses' credit will need to be checked. Furthermore, if you were to ever end your relationship, or if your spouse passes away, your score will become all the more important.
Myth 6: With a bad credit score, I can never get a loan.
FACT: This isn't true, there are plenty of companies out there willing to give loans to people with poor credit. However, the loans will most likely have higher interest rates and require you to either put up collateral or put money down. Make sure to be aware of "predatory lending" offers, where loan amounts and repayment terms — like interest rates — are very high.
Myth 7: How I manage my bank accounts, investments and other personal finances impact my score.
FACT: Anything pertaining to your bank accounts, investment accounts or transactions made in cash have no effect on your score. That said, overdrafts can have an effect if your bank provides you with a line of credit in the event that you overdraw – then that line of credit may show up on your reports. You should make sure all accounts are closed properly and all fees are paid off. Unpaid fees can also end up on your report if sent to collections.
Myth 8: Disputing an account will make it come off of my report.
FACT: Disputing an account with the credit bureau will certainly do one thing — result in them investigating your claim. However, if they find the account or the information to be accurate, the information will not be removed.
Myth 9: I don't need to worry about my credit report because I will not be applying for any new credit.
FACT: This is like saying you don't have to worry about your weight because you don't plan on going to the doctor anytime soon. Just because you don't think you'll be applying for credit soon doesn't mean you should forgo maintaining good financial habits.
Lenders aren't the only ones to check your credit. Insurance companies and potential employers may check and having bad credit can keep you from getting a good insurance rate or a new job. It also takes time to improve credit, which could take years, so don't put off managing your credit responsibly.
Myth 10: Credit scores are locked in for six months.
FACT: Your credit score changes as soon as data on your credit report changes. Which could be on a daily or weekly basis, depending on when creditors report the information to the credit bureaus. This is why staying financially responsible, and checking it often, is important to maintaining good credit.
These myths aside, the best way to keep yourself in the know is to do your homework. Keep track of your debts, and review your credit report at least yearly and compare it to your financial history. All it takes is a little initiative and less reliance on hype to maintain a good credit score and good financial health.
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