Considering how ubiquitous credit card usage has become, there’s a surprising amount of misinformation out in the world regarding credit scores. A credit score is simply a numerical representation that lenders use to determine the likelihood that a borrower will pay them back. It’s derived from a number of specific criteria that assess the general credit risk of a borrower, from the amount of debt they already have to their payment history and other factors.
Although credit scoring companies like FICO and VantageScore publicize what information goes into a credit score, there’s still plenty of speculation about what exactly moves the needle when it comes to an individual’s credit score. Here are some common credit score myths, along with explanations of what can really make your credit score rise or fall.
1. Does Checking My Credit Score Online Affect My Score?
No, checking your credit score online will not impact on your credit score. That’s because this type of credit check is considered a “soft inquiry,” which differs from a “hard inquiry” that occurs when a lender pulls your credit report. It’s entirely true that if you apply for new credit your potential borrower will run a credit check that may take a few points off your score. However, if you check your score yourself, there will be no effect whatsoever.
2. Will Carrying Larger Balances Help My Credit Score?
It’s true that you do need to use credit in order to generate a high score. However, the idea that you have to carry large balances every month to boost your score is complete nonsense. In fact, the opposite is true, as large debt balances will actually hurt your score. According to VantageScore, the percent of your available credit that you use is a “highly influential” component that goes into calculating your credit score. Carrying too high of a high balance on your cards, therefore, has a negative impact on your score. Ideally, according to Experian, you’ll want to use less than 30% of both your total available credit and the limit of any individual card; above that level, scores decrease rapidly.
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3. Will My Credit Score Increase When My Income Increases?
No. It might be surprising to learn that income plays no role whatsoever in the calculation of a credit score. According to VantageScore, the six components of a credit score are payment history, percent of credit limit used, outstanding debt, credit age and mix, recent credit behavior and amount of available credit. Income is not a part of any of those components. The correlation between income and credit scores most likely comes about because those with higher incomes have more available funds to pay off their debt, thereby boosting their scores.
4. Does Getting Married Result in a Joint Credit Score?
One of the decisions that couples make when they get married is whether they should combine their finances. But if you’re worried that you’ll have to merge your credit score with your new spouse, fear not. There is no such thing as a joint credit score, only individual ones. Whether you are married or not, your own personal credit history is yours alone. Now, if you open joint accounts with your spouse or sign on as an authorized user, those accounts will typically appear on your credit report as well. But even then, your actual credit score remains your own, and will never be joined with that of your spouse.
5. Will Paying Off My Auto Loan Help My Credit Score?
Now that you’ve learned that less debt is better when it comes to credit scores, it might seem to make sense that paying off your auto loan would also boost your score. But the answer is more complicated. In fact, in some cases, paying off a car loan may actually cause a temporary dip in your score. This is because when you pay off your auto loan, it becomes a closed account on your credit report. While a closed account is still factored into your credit score, a positive open account has a greater impact. That’s because lenders are more interested in how you’re managing credit now than in the past. However, any drop will likely be short-term in nature and only drop your score by a few points, according to Experian. It’s also important to keep in mind that there may be cases when paying off a car loan early might be the right financial move. For example, if you have a car loan with a high-interest rate or you’re trying to lower your debt-to-income ratio, paying off the loan could be beneficial.
6. Will Using My Debit Card Help Me Build My Credit Score?
Responsible debit card usage can be a sign of financial maturity, as you’ll have to manage your account to ensure you have enough money to pay for all of your monthly expenses. Unfortunately, a sound financial habit like using your debit card won’t matter one iota to your credit score. Essentially, using a debit card is the same as using cash. From the perspective of a bank, just because you can successfully manage your cash doesn’t mean that you can borrow money from a lender and pay it back. In fact, debit card issuers don’t even report to credit agencies. Thus, using a debit card will never have any effect on your credit score. However, lenders may ask to see your spending activity and bank statements, as those factors can influence their decision on various types of loans, such as auto loans or mortgages.
7. Will Taking Out a Mortgage Hurt My Credit Score?
This is a bit of a trick question. Yes, it’s true that when you first apply for a mortgage loan, your score may dip a few points due to the inquiry. And it’s also true that your score may suffer at first when you take out a mortgage, as you’ll suddenly have a new account with a large balance and no payment history. However, over time, your mortgage stands to help your credit score quite a bit. As the months go by and you continue to make payments on time, not only will the age of the account increase, so will your successful payment history. Thus, while a new mortgage may ding your score a bit at the outset, over time, it stands to raise it as long as you never miss a payment.
8. Does My Credit Score Really Matter in the Real World, Or Is It Just for Pride?
It’s true that some people boast about their 800-plus credit scores as if they are a badge of honor. And yes, earning a top-notch credit score is certainly a sign that you have managed your credit responsibly. However, the real-world implications of a top-tier credit score carry much more importance than simple bragging rights.
The higher you can get your credit score, the less interest you’ll have to pay on many loans, from mortgages and car loans to personal loans and even credit cards. In some cases, you might not even be able to get a loan unless you have a high credit score. The bottom line is that a high credit score is your key to unlocking low-cost financing and flexibility in your financial life going forward. As a quick example, imagine you can score a 3.25% mortgage rate thanks to your high credit, but your friend with a low credit score can only get financed at 4.5%. On a $300,000, 30-year loan, you’ll end up paying $170,023 in interest, but your friend will pay $247,220, or 45% more in interest.
9. Applying For a Lot of Credit Cards at the Same Time Won’t Hurt My Score Much, Will It?
The concept that multiple card applications in a short time won’t hurt your score much is rooted in a related truth, but it’s a complete myth. Every single time you apply for a new credit card, that hard inquiry will ding your score by a few points, perhaps even more if you apply for too many at once. This myth is likely perpetuated by the fact that multiple applications for certain types of loans in a short time period — specifically, home mortgages and auto loans — are considered by the credit scoring agencies to be a single inquiry. This is because it’s natural for a new home or car buyer to shop around to get the best possible interest rate before making such a large purchase. However, as credit card applications are just requests for unsecured loans, there is no such grouping of applications.
10. Should I Close Unused Credit Cards To Boost My Score?
It might seem logical that closing your unused credit cards would boost your credit score. But unfortunately, the exact opposite is actually true. For starters, the closure of a card lowers the amount of your available credit, which can knock your score down by a few points. Things get worse if you have any outstanding debt on other cards, as this reduction in your available credit will increase your credit utilization, another ding against your score. A final concern is the average age of your credit accounts. If you close an account, you no longer benefit from the age of that card in your credit file, nor your successful payment history. Even closed accounts remain on your credit report for 10 years, so this won’t have an immediate effect on your score, but eventually, the age and payment history of that account will disappear from your report, and your score will suffer.
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