Top Credit Score Facts and Myths

Credit scores matter. A lot.

So it’s best to understand what they are, how they are calculated and what they mean. Something this important should not be shrouded in myths that could cost you money.

Allow us then, to separate credit fact from credit fiction – and in the process save you money.

Buying into old wives’ tales about credit scores could cost the average American tens of thousands of dollars over their lifetime.

For instance, has anyone you know avoided getting married because you don’t want your potential spouse’s bad credit to drag yours down? Tell them to get moving down the aisle!

Your partner’s credit score does not affect yours, and vice-versa.

That’s just one example to illustrate a larger truth: What you don’t know about credit scores can hurt you.

Credit Score Facts

There are some inescapable facts about credit scores we all should understand. Most are common sense issues, but all are helpful in understanding why you are – or are not – considered a good credit risk.

1. Credit Reports and Credit Scores Are Not the Same

Credit reports and credit scores are different, but related.

In short, a credit score is derived from analysis of your credit report.

A credit report is a detailed list of your credit history, especially how you have paid bills and debts. This will include everything from bill payments to loan applications to divorce filings.

Credit bureaus assess that information and then assign a three-digit, numerical grade. That’s your credit score, and the higher the number the better the score. This score provides an insight into how you’re doing managing money, which is handy to know before you go shopping for a new house or car or apply for a credit card.

In 2020, FICO (Fair Isaac Corporation), one of the entities that assess reports and produce scores, changed its scoring model and gave more weight to a consumer’s personal loan history. That change negatively affected consumers who relied on those loans to pay off debt.

2. Credit Scores Are Based on Multiple Factors

Calculating your credit score comes via a math equation with all several variables. It’s based on five credit scoring factors with varying degrees of impact:

1. Payment history: Counts as 35% of your score. It’s a record of your bills and when you make payments. Three words of advice: Pay. On. Time.
2. Credit utilization: 30% of your score. That’s how much available credit you use. If you have a $1,000 limit on your card and you spend $500 this month, your utilization is 50%. The scoring system likes you to keep credit utilization under 30%.
3. Length of credit history: 15% of the score. This simply shows how long you’ve been using credit and paying bills. The longer the time the better because it gives credit bureaus a longer timeframe to see how you handle your finances.
4. Inquiries and new credit: 10% of a score. That’s when a potential lender checks your credit report. There are two kinds of inquiries. A “hard inquiry” is when a financial institution (banks, credit card companies, mortgage brokers) asks to see your report. Those negatively impact your score because it indicates you are seeking to borrow more money, which may stretch finances. A “soft inquiry” is when there’s no real money involved, like when an employer is conducting a background check, a utility company is setting up a new account or you’re just checking for yourself. Those inquiries usually don’t affect your score.
5. Diversification of credit: 10%. Credit comes in many forms, like mortgages, credit cards, auto loans, utility bills. The more varied your portfolio, the better. As long as you pay all those bills on time, of course.

3. Even Small Unpaid Balances Harm Credit Scores

Regardless of the balance, a missed payment can have consequences for your credit score. Payment history counts for the largest portion of your credit score.

FICO explains that this thinking is based on research that shows the amount of debt a person carries indicates how you will handle debt in the future. Logic says if you are carrying a $1,500 debt for that big-screen TV, adding a car payment or other big credit-card item will make paying all the debts more challenging.

This does not mean a small amount of debt is automatically a negative. The concern is when that debt grows, To FICO, the larger the amount of available credit used by consumers, the more likely that person is overextended.

4. Tracking Your Score Can Help Monitor Fraud

If your credit score doesn’t seem correct, you can check for inaccuracies or fraud on your credit report.

Even if it seems correct, it’s a good idea to occasionally review the list of transactions on the report. The Federal Trade Commission reports that one in five Americans have an error on their credit report.

A simple error is one thing, but if you become a victim of identity theft, you’ll want to know about fraudulent accounts right away.

5. Checking Your Credit Score Is Free

We can all check our credit reports once a week for free. This is far more generous than the legal requirement of once per year.

In 2023 as the country emerged from the Covid pandemic, each of the credit reporting companies (TransUnion, Experian, Equifax) made permanent a temporary program that allows us to request our credit report once per week.

You can request these weekly reports at AnnualCreditReport.com. This is the only site authorized by the government to provide credit reports. Be careful with other sites, which may scam or charge a fee. You may also call (877) 322-8228 to request a form.

Checking your report also will tell you what lenders see about your credit history. This provides a better understanding of your credit position.

If you request your report, check carefully to ensure it is accurate. It should be reflected on your report that you’ve paid off a debt. Personal information also should be checked for accuracy.

Experts recommend checking the report a minimum of once per year. Chase Bank recommends checking the score four times per year. There’s no strong argument against checking the reports, given it is free.

6. Opening More Credit Cards Affects Your Score

Diversity of credit is good, but opening too many credit cards is a red flag.

Every time you sign up for a new card, it’s a “hard inquiry” and your score will take a hit.

Retailers constantly tempt consumers with discounted purchases if they open a credit card. Before taking that step, it’s important to know what you’re getting into and the effect it will have on your score.

If you do open a credit card, keep the old ones open. Closing old credit cards reduces your length of credit history, which will have a negative effect on your credit score.

Credit Score Myths

We’ll now go over some myths you may have heard at the grocery store, restaurant, via social media or wherever you get your most unreliable gossip. Many are based on some shred of fact, but embellishing the story drives it into the “wives’ tale” category.

1. A Negative Credit Score Follows You Forever

Negatives on your credit report can be overcome in time, and the negatives stay on a credit report for seven years, not forever. Look at those seven years as if they are professional athletes: The impact diminishes as with age.

With credit reports, it’s even better, because bad actions can be overcome by good ones.

If you started missing payments at age 21 but got your bill-paying act together, bought a house and car and paid them off on time in your mid-40s, you won’t forever be judged by your youthful indiscretions.

2. Checking Your Credit Score Hurts Your Credit

Checking your own credit score is considered a “soft” inquiry and does not affect your credit score.

As we explained, multiple hard inquiries by financial institutions investigating whether to extend your credit are the ones that hurt your score. Even that impact isn’t that great, so don’t let it dissuade you from applying for a home improvement loan if your roof just caved in.

3. Rent Payments Help Raise Your Credit Score

Not always. The only way rent payments help is if your on-time payment record is reported by your landlord, and that does not often happen.

While FICO and VantageScore have begun to incorporate rental data, in reality less than 5% of rent payments are reported to major credit bureaus.

Landlords are not required to report credit scores, which means you must use a rent reporting company that will report your rent payments — for a fee. Boom, Rental Kharma and RentReporters are services that will ensure your good payment history makes your credit report.

4. Your Spouse’s Credit Score Affects Yours

One of the most misunderstood myths of marriage is that a spouse takes on the other’s credit score. That is simply not true. A credit score belongs to you and you alone, and your credit history remains your own.

“When you get married, you have two individual credit reports,” said Jonathan Ernest, an Assistant Professor in the Department of Economics at the Weatherhead School of Management at Case Western Reserve University. “Getting married in itself brings no change, just like living together in a long-term relationship would not.”

There is no such thing as a couple’s credit report. Credit history belongs to the individual, and marital status is not part of a credit report.

However, joint debt taken after marriage (think mortgage) will affect the credit scores of both parties. Pay the mortgage on time, both credit scores benefit. Pay them late or not at all, both credit scores suffer.

To repeat, a credit score is a number that estimates the likelihood that an individual will repay a debt. The number comes from an assessment of an individual’s credit reports. The higher the credit score, the better the credit history and the more generous a lender will be.

A good credit score and strong credit history make it easier to obtain a home or car loan, rent an apartment, or qualify for credit cards.

When considering your credit, a FICO score of 800 or above is exceptional, 740-799 is very good and 670-739 is good. Anything lower would be fair or poor.

5. A High Salary Helps Your Credit Score

Credit scores are not based on income.

Yes it’s true that the more you make, the better your odds of being able to pay debt. But the actual act of making the payments takes discipline and attentiveness. Being wealthy is not a guarantee of responsibility.

Whether you make $10,000 or $100,000 a year, what matters on the credit score is whether you pay your bills on time and don’t run up more debt that your wallet can handle.

6. Your Age Matters

Your age does not appear on a credit report. What is considered is the age of your credit accounts. Credit age shows lenders how long you’ve been making timely payments.

Younger folks need not fear, though. Age-related factors are nowhere near as important in determining a credit report as payment history and credit utilization.

7. There’s a Credit “Blacklist”

There is not. Credit bureaus simply collect data and assign scores. It’s up to individual lenders to decide whether your score meets their qualifications.

There’s no secret list everybody consults. If you keep getting rejected, it’s because you’ve blacklisted yourself by not paying your bills on time.

8. Every Missed Payment Impacts Your Credit Score

Missing utility payments may lead to an unpleasant phone call or your service being shut off, but it does not affect your credit score. Utility companies, cellphone providers and insurance companies routinely check your credit score before extending service, but they usually don’t report your payment information to credit bureaus.

Sometimes, though, a company will pass overdue accounts to a collection agency. The collection agency will report the missed payments to credit bureaus and that damages your score.

Minor issues like parking tickets and library fines are not reported to credit bureaus. If your conscience doesn’t bother you, you can probably get away with keeping that overdue library book.

9. Your Employer Can See Your Credit Score

Employers can access credit scores only if you give permission. No permission, no access.

However, employers can see a limited version of your credit report. Information they can see is limited to payment history, available credit, account balances, bankruptcies and foreclosures. They cannot see your credit score, income, and other personal information protected by privacy laws.

California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington as well as some of the nation’s larger cities (Chicago, New York) do not allow an employer to see a credit report during the hiring process.

An employer who wants to see a credit report may do so because they are hiring for a position involving financial management or financial planning. You have the right after to respond to any negative or concerning findings.

10. It’s Hard To Improve Your Credit Score

It can be, but there is help available. Nonprofit agencies offer credit counseling and programs that can ease the struggle. Millions of credit-challenged Americans have found relief through debt management programs. That’s where a counselor works with lenders to lower your interest rates, and your monthly bills are combined into one payment.

11. Your Credit Score Doesn’t Matter

This one borders on the absurd. If you believe this one, you’ve probably never tried to buy a house, a car, get insurance for either one or purchase anything on credit. Either that, or you’re so rich you don’t give a darn what your score is.

A high credit score not only improves your chances of getting a loan, it means you’ll get a lower interest rate. And if you don’t think interest rates matter, ask your accountant. A 30-year, $300,000 mortgage with a 3.5% interest rate would have a monthly payment (minus taxes and insurance) of $1,349. If you had a 5.0% interest rate, your payment would be $1,613.

The difference puts $264 in your pocket every month.

Separating Fact From Fiction

Credit scores are an important facet of our lives. They can affect everything from being able to obtain a credit card to paying for the new water heater to qualifying for the loan for our dream house.

The most important thing to remember about credit scores and reports is they are based on our history. If we pay on time and in full, our scores will be high. If we don’t (for good reasons or bad), our scores will suffer.

Even with that, it’s important to know the truth and cut through the nonsense. Distinguishing myth from truth is an important part of understanding credit.

Understanding leads to wisdom, and applying wisdom to our financial practices leads to mental and physical well-being.