The Mistake That Could Hurt Your Credit Score By 200 Points!
Five Credit Score Misconceptions That Can Cost You
The Internet is brimming with tales of how your complete lack of knowledge surrounding credit scores is costing you big every day.
We get it. How about some good news for once?
Finding out you had it wrong all along doesn’t have to be a bad thing. In fact, you could be relieved to learn you were mistaken.
The following are common misconceptions about credit that you’ll be happy to know aren’t true at all.
7 Myths About Credit Scores Explained
1. Closing my oldest credit card will shorten my credit history.
One of the most pervasive credit myths, closing an old credit card account will not lower your credit score due to a reduced credit history. Closed accounts in good standing actually stay on your credit report longer than negative entries, thus maintaining the positive credit history that attributes to a higher score.
As credit bureau Experian explains on its blog, “Even if closed, the accounts that have no late payment history remain on your credit report for 10 years from the date closed. As long as the positive information remains, it contributes to a stronger credit history.”
That’s not to say, however, that closing a credit card account can’t hurt your score. If you are presently carrying debt — whether it’s an outstanding loan or another credit card balance — eliminating a portion of your available credit will increase your credit utilization ratio. And that’s bad news for your score.
2. Checking my own credit will ding my score.
It’s true that multiple credit inquiries can have a negative affect on your credit (depending on the circumstances — more on that in No. 6), but not if you’re the one doing the inquiring. You could check your credit every day if you wanted, with no harm to it.
In fact, staying on top of your credit reports and scores is a smart way to help catch errors or instances of fraud right away. The sooner these problems are addressed, the faster your credit will recover.
3. Working with a credit counseling agency will be reported to the credit bureaus.
Simply seeking out the advice of a credit counselor will not be reported to credit bureaus and won’t affect your scores positively or negatively. However, the actions you take at the recommendation of a credit counselor can impact your scores.
Credit scoring agency Fair Isaac explains on its website:
“For example, choosing to make partial payments or agreeing to settle for less than the full amount on accounts may be regarded negatively by the FICO® scoring model. Additionally, any late payments occurring either before or after you began the plan may also be regarded negatively.”
4. Earning a lower income means being stuck with a lower credit score.
Like credit counseling, your income has no correlation to your credit score.
Claire E. Murdough, a contributing writer to personal finance blog ReadyForZero, explained, “A high earner can have terrible credit and a low earner can have excellent credit. Just because you make a good wage does not mean you’ll have high credit and salary does not necessarily indicate financial responsibility.”
She added, “Instead of focusing on simply making more, it’s helpful to focus on the ways that you can work to solidify a solid financial foundation.”
5. Paying off my cards will prevent my score from increasing.
A common credit myth is that you have to carry a balance on your credit card in order to generate activity. The truth is that paying off your bill in full every month is the best thing you can do for your credit rating. As long as you are using the card regularly, the activity will be reported to credit bureaus regardless of whether or not you pay the entire balance.
Credit Reporting Expert and President of Consumer Education at SmartCredit.com, John Ulzheimer, stated on the site that, “Another thing to consider, along with expensive interest, is the impact on your credit scores of carrying a balance … Carrying a large balance relative to your credit limit can have a negative impact on your credit. Less than 10 percent should be your target.”
6. Rate shopping for a loan will result in several dings to my credit score.
When you apply for a credit card or loan, the lender performs a hard pull of your credit report to determine your creditworthiness. One or two of these hard pulls can cause a slight, temporary decrease in your credit scores. Many inquiries over time can result in a significant decrease in score and is a big red flag to creditors.
That is, except when you’re shopping around for a loan. Since getting the lowest interest rate possible on a home, auto or student loan is incredibly important, credit bureaus understand you will want to get quotes from several lenders before settling on a deal.
Fair Isaac explained “the FICO score ignores inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”
It’s recommended that if you are looking for a loan, keep rate shopping limited to within a 30-day period to protect your credit score.
7. A low credit score could cost me my job.
This last myth is more about the perceived consequences of a low credit score, but bears discussion nonetheless.
Although it’s not uncommon for employers to review certain parts of your credit report as part of the hiring process, no one will ever look at or consider your credit score. These two words are often used interchangeably, but mean two very different things.
“It is illegal for credit scores to be used as a tool for screening potential employees,” Kimberly Foss, certified financial planner and founder of Empyrion Wealth Management, told Daily Worth.
An employer can only pull your credit report with your permission, and even then, they don’t get the full picture. Essentially, they’re looking for major warning signs of irresponsible behavior — but your score, whether high or low, should never be a determining factor.