A March 2020 survey from U.S. News showed that about a quarter of respondents believe their income affects their credit scores. With all of the financial fears due to the impact of the coronavirus, allow me to ease your mind about this. If you're experiencing a temporary loss of income, that alone will not reduce your credit score.
The algorithms used to generate a credit score don't consider your income. If you're using credit responsibly, you can have a great credit score even if you have a low income.
The survey showed that there are other misconceptions that could be adding to your list of worries. Here are a few other key findings:
-- About 58% either don't know whether carrying a credit card balance will improve your credit score or believe it will boost your score.
-- More than 18% think checking your credit hurts your score.
-- Almost 31% report that they aren't sure if a credit score and a credit report are the same thing. More than 16% believe scores and reports definitely are the same thing. So, almost half of respondents are unclear about the difference between a credit report and a score.
Let's tackle some of these beliefs , and set the record straight. You can't control what's happening in the world right now, but understanding how credit works might help you protect your credit as much as you can during the coronavirus crisis.
Do You Have to Carry a Balance to Increase Your Credit Score?
For some reason, this idea has persisted for decades. When you carry a balance and pay interest on your purchases, you might as well be throwing your hard-earned money into the wind.
So, here's the good news: You do not have to carry a balance to boost your credit score. You can earn a great credit score without paying interest.
If you have the money to pay your bill in full by the due date, then do it. But if you already have a balance, I suggest you pay the minimum right now in case you need the cash before this crisis is over. In times like this, hoarding your cash is a good idea.
You'll get through this. This chaos will pass, and when this is over, then it's time to get aggressive and pay off your debt.
How to Get a Credit Report
While you're at home and practicing social distancing, you probably have time on your hands. Now is a good time to do a little credit housekeeping.
The websites that offer free scores and report cards give you valuable information about your creditworthiness. They tell you how well you're doing in each factor considered by credit scores, such as payment history and the amount of credit you've used.
But the only free annual credit report that's authorized by federal law can be requested at AnnualCreditReport.com. Note: Checking your report does not affect your credit score.
A credit report contains your financial accounts and history, personal information, credit inquiries, and public record information. You're entitled to a free credit report from each of the major credit bureaus every 12 months. It's important to review each report and make sure there are no errors. An error can contribute to a lower score.
Speaking of scores, credit reports do not show your credit score. That's a separate thing.
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How to Check Your Credit Score
Your credit score is a three-digit number that represents your creditworthiness. When a lender requests your credit report, it usually also asks for a credit score.
Here's where there's overlap between your report and your score. Your credit score is generated based on the data contained in your credit report.
The most common score requested is a FICO score, but VantageScore is also sometimes used. If you have at least one credit card, check whether you can get a free credit score. Many of the major issuers now provide your score (not always FICO, but it's still helpful) along with your monthly statement.
There are also multiple websites that offer free educational scores and credit report cards. Keep in mind that these aren't FICO scores, and you aren't getting your official credit report, either.
You can get a FICO score from myFICO.com, but it's $19.95 for a one-time report and a FICO 8 score from one bureau. Be careful that you don't accidentally sign up for a monthly service. Note: Checking your credit score does not lower your score.
Payment History Is 35% of Your FICO Score
In 2019, U.S. News asked respondents if paying your bills on time improved your score. Only 50% of those surveyed knew that on-time payments were critical for having a great score.
In 2020, those who know the connection between payment history and credit scores rose to 61%. That's a great improvement in credit knowledge in just one year.
If money is tight right now, do your best to at least make minimum payments. If you can't do that, then contact your credit card issuer and explain your situation. During this crisis, some issuers may let you skip a payment. Just be sure you call and ask for help before your due date.
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