The credit industry is probably one of the most confusing and seemingly backwards industry to understand. At times it may seem easier to make sense of the tax code as provided by the IRS. As a caveat, these are some general scenarios and situations we’ll talk about — everyone’s financial situation is different and you should consult a certified financial planner, accountant, and/or legal counsel to review your financial health.
Many factors go into your credit score, 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.
Credit is a bit of a paradox: To get credit, you need credit, and when you need credit, you can’t get credit because you don’t have any credit. So how do you get credit?
That first credit card you get with a $250 limit is what gets the ball rolling. You use your card, pay your balance in full every month, and over time you’ll see your credit score start to increase and you’ll open yourself up to being able to find other credit cards that provide benefits/incentives.
With that said, let’s take a look at some pretty poignant myths and then some facts about credit.
Myth: I have one credit score and one credit report.
Actually you have multiple credit scores and three credit reports. It is important to watch all of them because they’re all different! Experian shows I have a total of 45 accounts on my report while Equifax and TransUnion show 44. Experian shows 11 inquiries, Equifax 13, and TransUnion only 3 in the past 2 years. Having all three reports and all three scores is the only way to know your true credit health.
Myth: If I check my credit, I will hurt my credit score.
If you check your credit personally, or through a third party service (such as CreditSesame, CreditKarma, Quizzle, or ScoreSense), it will not impact your credit score negatively. These inquires are not hard inquires (the ones that are actively reported). You could sign up for 10 different credit-monitoring services, along with the sites mentioned above, they could check your reports and scores on a daily basis and have zero impact on your credit score.
Myth: I do not need to monitor my credit report.
I really hope no one thinks it is okay not to monitor their credit. Identity theft and incorrect data on credit reports are widespread. On a personal note, my mom had her identity stolen and had to deal with it while trying to refinance her home. It took her 6 months to get it settled. Lucky for her, the bank honored the rate they initially agreed upon when they started the process.
My wife and I use CreditSesame, CreditKarma, and ScoreSense to watch our scores and reports. The first two are free and the latter we pay $12.95 per month for, a rate we were offered through a retention call when we planned on canceling. Minimally, you should leverage AnnualCreditReport.com to obtain your credit reports from Experian, Equifax, and TranUnion on an annual basis for free. With 10% of all credit reports estimated to have mistakes, this free access mandated by Congress makes sense.
Myth: If I close a credit card/loan account, it’ll boost my credit score.
There is danger in closing your oldest accounts, which provide the “aging” to your credit file. By 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%.
Myth: If I lower my credit limits, my credit score will increase because I will have less liability.
Quite the opposite actually. Having available credit and not using it excessively indicates you’re a lower risk, and thus will improve your credit score. In fact if you remove some of your available credit, it can shift your open balance-to-utilization ratio out of whack. Never reduce credit limits without getting something in return.
Myth: I need to carry a credit card balance to have good credit scores.
Carrying a balance won’t help your scores. Using your cards on a regular basis and keeping your utilization in check (under 30% at all times — people with the best credit scores have an average utilization between 5-10% each month), and paying your bills on time are what will keep your credit score up. 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).
Myth: Using my debit and check cards will help me build my credit score.
This just isn’t the case. These cards are not tracked on your credit report. As long as we’re responsible spenders and make sure we can always pay our bills generated from our credit cards each month, we’ll stick with credit.
Myth: Because I make a lot of money and have high income, my credit scores will be high.
There are many things tracked on your credit report, but income is not one of them. You could make $1,000,000 a year and have a 550 credit score, or earn minimum wage and still keep a strong 800 score. Income isn’t a factor in your credit score, however, it is a factor when creditors look at extending credit and loans as a method to identify whether you’ll be able to repay the loan or credit extended.
Fact: Inquiries by creditors will impact my score.
It is really important to understand this one. An inquiry (which happens when you apply for a loan or credit card) will impact your credit score, but only temporarily. Inquiries from creditors fall completely off two years after they post to your report. The initial impact of a new credit inquiry is usually 2-5 points and over the course of the two year period, that impact is completely diminished. I’ve had upwards of 17 inquiries on my report and have still been approved for new accounts.
Fact: If I miss a payment I can contact a creditor, explain what happened, and erase any negative impact.
Everyone makes mistakes and creditors realize this. When you miss a payment, a creditor will typically assess a late fee and some level of interest on the owed amount. The worst thing you can do in this scenario (other than not paying) is to just pay and not contact the creditor. Calling and explaining shows that you’ve identified a problem, have owned up to it, and are asking for forgiveness. The banks aren’t heartless, but they are in the business of making money. They want to keep you as a happy customer and oftentimes will waive a fee and interest as a courtesy if you make a speedy payment and commit to not missing again. Now, the second time you have a slip they may not be as nice, but the point here is that communication is key. Build a relationship with them — it’ll only help your cause.
Fact: If I apply for a credit card and don’t get instantly approved I can still get the card.
Even if you receive a denial notice, you still have a chance to get approved. Keep in mind the computers do a lot of work here and try to process everything automatically. If a person reviewed every application, it would cost a lot of money. However, just because you may not have gotten an instant approval doesn’t mean you’re not going to get the card. Whenever you have a question about an application, contact the creditor.
We intend for this page to serve as a living FAQ regarding credit myths and facts. Got any that you’d like add? Please comment below or email us.
Remember, while we provide this information as a resource and do our 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.
Up next: Monitoring Your Credit Scores
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