Fact or fiction? There are plenty of credit score myths that borrowers believe to be true. Some can lead to the mismanagement of money and credit accounts, which is why it is essential to know the correct information about credit scores.
In this guide, we’ll debunk the common myths about credit scores and go over what is actually real so you can stay informed.
Understanding the factors that affect credit score
- Myth: A good credit score means you have a lot of money.
- Fact: A good credit score means you’re a reliable borrower of credit and funds.
Your credit score isn’t determined by how much money you have. Rather, it is meant to show how risky it is to lend money to you, which is typically what those who perform a credit check on you want to know.
Your credit score is affected by various factors, with the main five being:
- The length of your credit history
- Your payment history
- Your credit mix (i.e. how many different kinds of credit accounts you have)
- Amounts owed
- New credit
What indirectly helps your credit score is having a higher income because it provides you with more financial stability, enabling you to pay off your debt sooner.
- Myth: Negative marks affect your credit score forever.
- Fact: Most negative marks on your credit report get wiped after 7 to 10 years.
If you have a negative item on your credit report, even if it is something like bankruptcy or foreclosure, it won’t affect your credit forever. After a certain period of time, the negative information will be wiped from your credit report, no longer affecting your credit score.
Most derogatory marks on credit disappear within 7 years, such as loan defaults and foreclosures. A bankruptcy filing may stay on your credit report for up to 10 years after the initial filing date depending on the kind of bankruptcy.
It can be disheartening and frustrating to receive a derogatory mark on your credit report because it will appear on your credit report for several years, hurting your credit score and ability to receive loans or credit extensions. However, the good news is that these marks will disappear from your credit report eventually.
Checking credit reports for errors and inaccuracies
- Myth: Checking your credit report hurts your credit score.
- Fact: Checking your credit report doesn’t have an effect on your credit score.
There are two kinds of credit checks: soft inquiries and hard inquiries.
A soft inquiry occurs when someone does a “soft pull” on your credit. This happens in cases like when a creditor wants to pre-qualify you for a promotion. It does not affect your credit score at all.
A hard inquiry takes place when someone does a “hard pull” on your credit. This is typically done when you officially submit a loan application and the lender needs to know if it is too risky to lend money to you. Each hard inquiry can decrease your credit score by up to 5 points. Successive hard inquiries may hurt your credit score more.
When you check your own credit, it’s considered a soft inquiry. There is no effect on your credit score (as long as you’re checking your credit using a legitimate source like one of the three credit bureaus).
Since checking your credit report has no negative impact on your credit score, it’s advisable to monitor your own credit so that you know where you stand credit-wise. In addition, the habit of regularly checking your credit report can help you spot any errors, inaccuracies, or unauthorized inquiries.
- Myth: Credit bureaus make sure that your credit report is always accurate.
- Fact: Credit reports can have errors and inaccuracies that need to be disputed.
Credit card companies, government agencies, employers, and landlords are all examples of parties who might be interested in credit checking you. However, when erroneous information about your credit is provided to a credit bureau, you will need to dispute it so that your report can be fixed.
To deal with an inaccuracy on your credit report, disputes can be submitted online, by phone, or by mail to each of the three credit bureaus: TransUnion, Equifax, and Experian. You may also want to reach out to the creditor that made an unauthorized hard inquiry or provided inaccurate information.
Paying bills on time to avoid late payments
- Myth: I just need to make the minimum payment on my credit card each month.
- Fact: Paying more than the minimum requirement is often worth it.
The minimum payment for a credit card account is typically either between $20 and $40 or 1% to 3% of the account balance. It’s advisable to pay more than this minimum requirement so that you can decrease your account balance substantially.
Even if you make the minimum requirement so there is no damaging effect on your credit score, it is still a good idea to pay down the credit card balance. It can help you become debt-free sooner, lowers your credit usage, and prevents too much interest from accumulating.
Remember that when you pay a balance down to $0, your credit card company no longer charges you interest. When there is any existing balance again, interest begins to accrue.
Regardless of how much you pay each month, try to make the minimum payment on-time. That way, you can prevent your credit score from taking a hit.
- Myth: Once a bill is late, there’s no point paying it.
- Fact: Paying a bill late is better than not paying at all.
When it comes to personal loans and credit card debt, paying your bill late is typically better than never. Otherwise, interest will continue to accrue, your credit score will continue to plummet, and your debt will eventually go into default.
If you default on debt, not only does your credit score drop significantly, but a negative mark will appear that is visible to those who pull your credit report. This can make it much more challenging to obtain personal loans.
Reducing credit card balances to improve credit utilization ratio
- Myth: There’s no problem if you max out a credit card as long as you pay it down later.
- Fact: A high credit utilization ratio can hurt your financial stability and credit score.
Your credit utilization accounts for around 30% of your credit score. The lower your credit utilization, the better it is for your credit score.
Your credit utilization ratio expresses in a percentage how much of your total credit limits you are currently using. It is calculated by adding up your total balances across all of your accounts and then dividing that by your total credit limits.
Creditors may look at your credit utilization ratio when deciding whether to grant you a loan. Most of the time, it is a good idea to keep your credit utilization below 30%. This can also help you maintain a healthy credit score.
Because of how credit utilization affects credit scores, it’s generally a good idea to avoid maxing out your credit cards if possible.
Increasing credit limit to lower credit utilization ratio
- Myth: Increasing your total credit limit is an easy way to lower your credit utilization.
- Fact: Increasing total credit limit does not guarantee a lower credit utilization ratio.
Many credit cardholders believe that if they successfully apply for a higher credit limit, it is a fast and convenient method to lower their credit utilization ratio and boost their credit score.
However, in the long run, what typically improves your credit score is habitual good credit behavior and responsible financial management. If you increase your total credit limits but fail to maintain the same level of expenditures, your credit utilization could more easily spiral out of control.
Avoiding opening too many new credit accounts at once
- Myth: Opening new credit accounts improves your credit score.
- Fact: Too many new credit accounts can be a red flag that hurts your credit score.
A good credit mix means having a variety of different credit accounts open. For example, you might want to have loans, credit cards, and mortgages. Because of this, it seems like opening new credit accounts should improve your credit score.
However, if you open too many new credit accounts at once, your credit score could take a hit. “New credit” accounts for around 10% of your credit score, which means that if you have applied for or obtained numerous new accounts in a brief period of time, your credit score will decrease.
It is typically a good idea to wait around three to six months after opening a credit account before opening another new one. This way, you can minimize the negative effect on your credit score.
Keeping old credit accounts open to maintain credit history length
- Myth: You should close unused, old credit accounts.
- Fact: Keeping an old credit account open can actually help your credit score.
As counterintuitive as it seems, old, unused credit accounts can actually help you maintain a good credit score. This is because having a longer credit history length is a simple way to show creditors that you have an impressive track record of paying back your debt and managing your finances.
If you want to avoid credit score dips because you want to apply for a credit card or a loan with a higher credit score, you might want to keep your old credit accounts open.
The caveat is that in certain situations, closing an old credit account may be preferable. This is especially the case if a particular account has plenty of negative items and shows that you mismanaged your debt.
Negotiating with creditors to remove negative marks on credit report
- Myth: You should never trust your creditor or lender.
- Fact: Negotiating with creditors could bring you meaningful credit benefits.
Negotiating with your creditor or debt collection agency may sound like a daunting concept, particularly if you have negative marks on your credit report such as late payments or foreclosures. However, it might be worth trying to persuade your creditor to remove a negative item from your credit report.
One common strategy used in negotiations with creditors is the “pay-for-delete” tactic. In this case, you would be offering to pay your debt in its entirety or a significant portion of it–in return, the other party would agree to remove a negative mark from your credit report.
Everyone has their own situation and needs that require careful assessment when it comes to credit negotiations. If you are struggling with poor credit and derogatory marks on your credit report, it may be worth obtaining counsel from a professional financial advisor.
Seeking professional credit counseling to develop a debt management plan
- Myth: Credit counseling and debt settlement are the same thing.
- Fact: Credit counselors can help you devise a debt management plan, but they are not debt settlement companies.
Credit counselors are expert advisors who can help you assess your needs and goals, improve your debt management skills, and empower you to tackle your debt.
On the other hand, debt settlement agencies help you negotiate with creditors to settle a debt or change its terms so that you receive debt relief. Debt settlement is often viewed as a last resort before you default on an outstanding balance, whereas creating a debt management plan is a more proactive way to effectively handle your debt.
Being patient and consistent in credit score improvement efforts
- Myth: Bad credit can be fixed overnight.
- Fact: Good credit scores require good financial habits and consistent good credit behavior.
While there are effective strategies that you can implement to see quick boosts to your credit score, if you want to have a great credit score that remains stable in the long run, it’s important to be patient.
One of the greatest indicators that you are creditworthy in the eyes of creditors is that you show a consistent capability to pay your bills on time. This is why the biggest boosts to your credit score are generally not able to be done overnight.
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