Don’t Be Fooled By These Common Credit Myths
Some myths are all in good fun. There’s no harm in believing in the elusive bigfoot or holding onto hope that you’ll someday run into Elvis while filling up at the gas pump. But myths about your credit score are more than a tall tale — they are just plain bad advice.
We all know how powerful that three digit score can be; it determines your interest rate on an auto loan or a mortgage, qualifies you for an apartment and can even keep you from getting a job. Don’t ruin it by falling for credit score fairytales. Let’s debunk these myths together.
Closing an account magically erases them from your report
Credit reporting bureaus aren’t exactly forgetful, so closing your account doesn’t wipe the slate clean and rid the report of any credit missteps. Unfortunately, mistakes don’t disappear that easily. If you’ve had issues making payments or had negative credit events, those pieces of information are likely to stay on your credit report for up to seven years. While we’re on bad advice regarding closing accounts, cutting up the card doesn’t do anything.
Using prepaid debit cards will give your credit score a shot in the arm
No one is reporting the use of prepaid debit and credit cards to the credit bureaus so it doesn’t make a difference. If you’re trying to rebuild your credit but can’t get approved for a traditional credit card, you might try a secured credit card. For these cards, you offer collateral to get the it (something like a car or cash), and then when you use the card the lender reports your actions to the credit bureaus to build your (hopefully positive) credit history.
Your credit is good because you don’t have credit cards
Not necessarily. Not utilizing credit cards is not a sure indicator that your credit score is golden. Actually, wisely using credit cards can go a long way in giving you a better score than having none at all. What is necessary is building a positive credit history that shows you can open accounts and pay off your debts.
Closing old accounts will up your score
This is more of a really complicated half-truth than a myth, because closing old credit cards and accounts you no longer use is more likely to decrease your credit score due to the decrease in available credit you could be using but aren’t. This is because lenders are looking at your credit utilization. They’re looking for people who are only using a little of the credit they have at their disposal, as opposed to someone who as every line of credit maxed out.
If you’re going to close accounts you don’t use, you’ll want to close accounts that are newer, so you don’t harm your long-established credit history, and accounts with low credit limits, so you don’t damage your credit utilization.
There’s only one score
There are many credit scores, but the most commonly used by creditors is the FICO score from Fair Issac Corp. It’s so common, in fact, that the brand name is sometimes used to describe all credit scores. (Like when people say they need a Kleenex when they just need a tissue.) FICO is the preferred scoring in lending decisions, but lenders chose which score they look at to make a decision.
Even within FICO there are various versions of your score that FICO creates based on the entity who needs it. For example, your score for your insurance company may be different than your score for your landlord because they need it for different purposed.
You joined hands in marriage, now you join credit scores
You may have vowed to share your lives together, but that doesn’t mean you share a credit score. Getting married doesn’t create a new shiny new joint credit report. They’re tied to your social security number, and unlike your last name and your bank account, there’s no sharing that with your newly betrothed.
The only way your credit scores affect each other is if you apply for an account together such as a credit card or mortgage, the interest rate you get will be based on both scores. Also, the account information will go on both of your credit reports.
Just checking your score makes it go down
Check it out! It’s okay! Looking at your personal credit score doesn’t sound any alarms to the credit reporting bureaus to drop your score. The problem comes when other people start pulling your credit report, like when you’re applying for a mortgage. That’s known as a “hard credit inquiry” and if too many of those happen if can cause a negative effect.
To beat the system when looking for a mortgage or car loan, keep your shopping to a maximum of two weeks. When the lenders pull your reports so close together it appears as one event to the scoring system instead of several across a long period of time.
Just pay the full balance every month and you’ll be perfect
Of course you want to pay the full balance off every month, that’s the cardinal rule of staying out of credit card debt and keeping a pristine credit score, but there’s more to it.
The commonly used FICO scoring model weighs credit utilization at 30% when it generates your credit score, and it frowns upon using more than 30% of your credit limit on credit cards.
Even if you’re diligent about paying off your balance, the problem arises if you charge more than 30% of your credit limit at any time. The card companies can report to the credit reporting bureaus before your payment due date, so even if you’re paying off the balance in full that month, the amount charged may be reported while you have more than 30% of your credit limit exceeded and harm your score.
There are many misconceptions about credit so make sure to look for information from reputable sources. If you’re wondering where to start, visit www.annualcreditreport.com to get your free credit report and learn more.