Top Credit Score Facts and Myths
Credit scores really, really matter. Something so important should not be shrouded in myths that could cost you money.
Allow us then, to separate credit facts from credit fiction and save you millions of dollars.
Okay, maybe not millions. But falling for old wives’ tales about credit scores could cost the average American tens of thousands of dollars over their lifetime.
For instance, have you avoided getting married because you don’t want your potential spouse’s bad credit to drag yours down?
Get moving down the aisle!
There are plenty of reasons not to get married, but the fact you’d be getting hitched to a deadbeat with a credit score of 420 shouldn’t be one of them. His score does not affect yours and vice-versa.
In short, what you don’t know about credit scores can hurt you.
Credit Score Facts
Every consumer should know that there are some inescapable facts about credit scores they should be aware of. Most of these are common sense issues, but they are helpful in understanding why you are – or are not – considered a good credit risk.
Credit Reports vs. Credit Scores
Credit reports and credit scores are different, but closely related. A credit report is a list of the transactions that affect your creditworthiness – everything from bill payments to loan applications to divorce filings.
Credit bureaus crunch all that information and assign a numerical grade. That’s your credit score. It’s an indication of how you’re doing managing your money, which is handy to know before you go shopping for a new house or car or apply for a credit card.
FICO is changing its scoring model in 2020 by giving more weight to a consumer’s personal loan history. It could negatively affect consumers who’ve relied on such loans to pay off debt.
Credit Scores Are Based on Multiple Factors
Calculating your score is a math equation with all sorts of variables. It’s based of five credit scoring factors with varying degrees of impact:
- 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.
- Credit utilization– 30% of your score. That’s how much available credit you use. For instance, 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%.
- Length of credit history– 15%. This simply shows how long you’ve been using credit and paying bills. The longer, the better because it gives credit bureaus a better idea of how you handle your business.
- Inquiries and new credit– 10%. 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. 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.
- 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.
Even Small Unpaid Balances Harm Credit Scores
Payment history counts for the largest portion of your credit score. Regardless of the balance, a missed payment can have deep and lasting consequences for your credit score.
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. 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.
Checking Your Credit Score Is Free
Consumers are entitled to a free credit report annually from each of the credit-reporting companies (TransUnion, Experian and Equifax). You can request them at AnnualCreditReport.com or by calling 1-877-322-8228.
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, but 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
Here is a list of things you heard at the beauty salon, barbershop, employee lunchroom or wherever it is 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.
A Negative Credit Score Follows You Forever
The negative information on your credit report stays there seven years, but like athletes who get old, their impact diminishes as it ages. So, if you started out missing payments at age 21 but got your 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.
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 earlier, multiple hard inquiries by financial institutions investigating whether to extend you credit are the ones that hurt your score. The impact isn’t that great, however, so don’t let it dissuade you from applying for a home improvement loan if your roof just caved in.
Rent Payments Help Raise Your Credit Score
Traditionally, rental payments were not factored into credit scores, but new credit scoring models by FICO and VantagesScore have begun to incorporate rental data. The problem is that:
- Many lenders prefer the old scoring models
- FICO estimated that less than 1% of rent payments get reported to credit bureaus
- Rental payment data is primarily used to improve credit access to those without credit history, not to boost the scores of those who already had a history of making credit card payments.
Landlords rarely, if ever, will report positive rental payments for you. However, there are services you can use to report your own rental payment information.
Credit Scores Are Universal
That means you have one score that every lender checks. That’s sort of true. FICO scores are used in 90 of lending decisions. Problem there is that there are now 10 FICO scores and six or seven variations of each one. There also are scores calculated by the three national credit bureaus – Equifax, TransUnion and Experian – each of which uses a similar, but slightly different method. In other words, if you have a bad credit with one bureau, you’re going to have a bad score with all of them.
Your Spouse’s Credit Score Affects Yours
Your credit score reflects only your financial transactions. Just remember, if you and your spouse (or anyone else) jointly apply for a loan, lenders will look at both scores to determine creditworthiness.
It Takes Seven Years to Digest Gum If You Swallow It
We’re just seeing if you’re still paying attention! Gum digestion is a whole different category of old wives’ tales. But a Chapter 13 bankruptcy will gunk up your credit score for seven years. So, if you ever have the choice of swallowing gum or filing for bankruptcy, definitely go with the gum.
A High Salary Helps Your Credit Score
A good income makes it easier to pay bills and improves your chances of getting a loan. However, credit scores aren’t based on income. Whether you make $10,000 or $100,000 a year, what matters is whether you pay your bills on time and don’t run up more debt that your wallet can handle.
Your Age Matters
Good news, Botox users. Credit bureaus track a lot of numbers, but your age isn’t one of them. There could be an indirect link to your score, however. Younger people generally make less money and have less experience with credit, and that can lead to financial mistakes. But older people will be penalized just the same if they make those mistakes.
There’s a Credit “Blacklist”
Credit bureaus simply collect data and assign scores. It’s up to individual lenders to decide whether your score meets their qualifications. So there’s no secret list everybody consults. If you keep getting rejected, it’s because you’ve blacklisted yourself.
Every Missed Payment Impacts 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. If you fall behind in those payments, they usually just cancel your service or coverage. But sometimes a company will pass overdue accounts to a collection agency. The collection agency will report the missed payments to credit bureaus and 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.
Your Employer Can See Your Credit Score
Employers can access credit scores, but only if you give permission. No permission, no access. They can look at your credit report.
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.
Your Credit Score Doesn’t Matter
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 about that. For instance, if you took got a 30-year, $300,000 mortgage with a 3.5% interest rate, your monthly payment (minus taxes and insurance) would be $1,349. If you had a 5.0% interest rate, your payment would be $1,613.
In real terms, that means you’d be able to buy 63 more Big Macs a month if you had the lower interest rate. Of course, if you actually did that, you’d probably die of heart disease before the loan was paid off. We do not advise that.
The Earth Is Flat
Huh? We’re again just checking to see if you’re still with us. Did you know that is a myth that everybody believed until about 600 years ago? Most scientists believed the earth was spherical.
And despite what you may heard, Columbus did not head to the New World to escape his wife’s bad credit score.
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
- Gravier, E. (2020, January 31) Can employers see your credit score? How to prepare for what they actually see when they run a credit check. Retrieved from https://www.cnbc.com/select/can-employers-see-your-credit-score/
- Arnold, C. (2020, January 30) FICO Is About To Change Credit Scores. Here's Why It Matters. Retrieved from https://www.npr.org/2020/01/30/800563459/fico-is-about-to-change-credit-scores-should-you-worry
- Lerner, C. (ND) 20 Old Wives’ Tales You Should Stop Believing By Now. Retrieved from https://www.rd.com/health/wellness/popular-old-wives-tales-fiction-or-fact/
- Gaskin, J. (2017, May 10) Truth Squad: Can Scoring Rental Data Vastly Improve Credit Access? Retrieved from https://www.fico.com/blogs/truth-squad-can-scoring-rental-data-vastly-improve-credit-access