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Understanding your credit score can oftentimes feel like trying to understand how the IRS works.  Many factors go into what your credit score is, whether it be on the FICO or VantageScore system, and there are plenty of myths about what those factors are and how they impact us.  I want to help you debunk those myths and get the facts straight.

1. Credit inquiries hurt my score – Yes, this is true, but only temporarily.  These inquiries fall completely off your report in two years. The initial impact of a new credit inquiry is only 2-5 points and over the course of the two year period that the inquiry is on your report its impact diminishes.  I’ve had up to 21 inquiries on my report and still been approved for new accounts.
2. Closing credit cards/accounts boosts my score – Not so.  The dangers in closing accounts are closing your oldest accounts which provide the “aging” to your credit file.  Closing accounts you raise the ratio of “open balances” to “available credit” showing that you’re using a higher percentage of your credit.  Keeping your utilization under 25% of your overall credit shows that while you are using your allocated credit, you are not over-extending yourself.  My monthly utilization is typically under 7%.
3. Checking my own credit report and score hurts my score – Absolutely false.  Checking your own credit by the way does not affect your credit score.  Minimally, you should leverage AnnualCreditReport.com to obtain your credit reports from Experian, Equifax, and TranUnion on an annual basis for free.  You should also leverage CreditSesame, and CreditKarma for your free Experian and TransUnion credit scores respectively.
4. I don’t need to check my credit report if I pay my bills on time – Not True.  Ten percent of all credit reports have errors on them. Use some of the services previously mentioned to check the accuracy of your reports for free, or sign up for a credit monitoring service.  Prices range from $5 to $30 / month for monitoring.
5. All credit reports are the same – Each credit reporting agency has a list of credit information in their file. They are not all the same. Experian shows I have 95 accounts on my history, Transunion only shows I have 78, and Equifax 83.  Having all three reports and all three scores is the only way to know your true credit health.
6. Asking for lower credit limits will help your score – Asking for lower credit limits will not help your score. In fact if you remove some of your available credit it can shift your open balance to utilization ratio as discussed in #2 out of whack. Never give away credit limits without getting something in return.
7. I need to carry a credit card balance to have good scores – Initially when starting a credit file, carrying a small balance and handling it properly can speed up establishing your good credit.  Once your credit has been established and you have several accounts you should make sure you’re paying your bills off in full each month (with the exception of a special promotion such as 0% interest of course)
8. Using my Check or Debit cards help my credit score – Checking accounts and debit cards do not influence your credit score.  Debit/check cards not only don’t help you build your credit score / history, most don’t offer any additional benefits that credit cards offer.
9. If I don’t get approved right away I won’t get approved – Many card issuers take their time in approving your application and don’t provide an instant approval. It happens to me all the time as a self-employed retired guy. Don’t sweat it. Call the application status line 48 hours later for an update on the application
10. A higher income means my credit score will be higher – False.  One thing that you won’t ever see on a credit report is your income.  While it is true that you’ll be asked for your income when you apply for a credit card, loan or mortgage , you won’t see it on your credit report.  Creditors ask for your income because it isn’t on your credit report and they use it as a method to evaluate your ability to pay any debts that you could accrue by having a new line of credit or loan extended to you.

I hope this explains some of the more frequently asked questions.  If you have a question please don’t hesitate to contact me at rick@frugaltravelguy.com.  While I provide this information as a resource and do my best to ensure all information is accurate you should seek the advice of a certified financial planner, accountant, and/or legal counsel with any concerns you may have.

Empowered with this knowledge, some experiences, and some know-how … let’s get started!

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