Debunking Credit Score Myths

Your credit score is an important factor in many financial decisions, such as qualifying for personal loans, credit cards, mortgages, and even renting an apartment. There are, however, a lot of common myths and misunderstandings regarding the factors that effect your credit score.

Below are some of the most common credit score myths.

• Having a negative credit score can have long-term consequences.

It may vary depending on the individual’s situation. Having a negative credit score can make it difficult to qualify for credit cards, loans, and mortgages, and even affect your ability to rent an apartment or get a job.

However, it’s important to note that there are some instances where a negative credit score may not have long-term consequences.

For example, if someone is not interested in borrowing money or applying for credit, then having a negative credit score may not affect them as much. Additionally, the negative information on a credit report typically only stays on for a certain amount of time (usually 5 to 7 years), so it would depend on a person’s situation.

• Selecting ‘credit’ while using my debit card for a purchase helps raise my credit score.

Debit card activity is not typically reported to credit bureaus, so using a debit card will not help you build credit or improve your credit score. Credit scores are based on credit reports, which show your borrowing and repayment history with credit accounts like credit cards, loans, and mortgages.

It’s important to use credit responsibly and make on-time payments to improve your credit score, but using a debit card for purchases will not directly impact your credit score.

• Checking your credit score can affect your credit score.

Checking your own credit reports or credit scores will not impact your credit score. When you check your own credit reports or credit scores, it is considered a “soft inquiry” or “soft pull,” which does not affect your credit score. On the other hand, a “hard pull,” such as when you apply for a credit card, temporarily reduces your credit score.

• Student loans don’t affect my credit score.

Student loans can affect your credit score. Your credit score is determined by various factors, such as payment history, credit utilization, length of credit history, types of credit, and new credit inquiries.

When you take out a student loan, it is reported to the credit bureaus as an installment loan. Your payment history on your student loan, whether you make your payments on time or not, can affect your credit score.

If you miss payments or default on your student loan, it can have a negative impact on your credit score. Additionally, the amount of debt you have and how it compares to your income can also affect your credit score. If you have a high amount of student loan debt compared to your income, it can negatively affect your credit score.

• The credit score of your spouse may affect yours.

Getting married doesn’t automatically merge your credit reports or credit scores with your spouse’s. Each individual has their own credit report and credit score that is based on their own credit history and financial behavior.

However, any joint accounts that you open together, such as a joint credit card or a joint loan, will be reported on both of your credit reports and will impact both of your credit scores. This means that any late payments, defaults, or high balances on a joint account can negatively impact both of your credit scores.

• Having a high salary can improve a person’s credit score.

While having a high income can certainly help you meet your financial obligations and manage your debts, it is not a direct input factor in your credit score.

Your income is not reported to the credit bureaus and is not used to calculate your credit score. However, lenders and creditors may consider your income when you apply for a loan or credit card, as it can help them assess your ability to repay the debt.

• I won’t have to be concerned about my credit rating till I’m older.

The minimum age to apply for credit is 18, and financial experts generally recommend that young people start building credit as soon as possible. This is because the length of your credit history is an important factor in determining your credit score, and establishing credit early on can help you build a strong credit history over time.

When you first start building credit, you may not have much of a credit history, so lenders and creditors may be hesitant to extend you credit.

It’s important to establish good credit habits early on, such as paying your bills on time, keeping your credit card balances low, and avoiding applying for too much credit at once. This can help you build a positive credit history and improve your credit score over time.

• My employer has access to my credit report.

While employers may be able to access your credit report with your permission, the type of credit report they can access typically does not include your actual credit score. Instead, employers will be able to see your credit history, which includes information about your debts, payment history, and any negative marks like late payments or defaults.

Employers may use this information to evaluate your financial responsibility and assess any potential risks related to hiring you. For example, if you are applying for a job that involves financial responsibilities, a prospective employer may be concerned if your credit report shows a history of late payments or high levels of debt.

• Maintaining a balance on my credit card increases my credit score.

Carrying a balance on your credit card does not help your credit score and can potentially hurt it. In addition to the potential negative impact on your credit score, carrying a balance can also be expensive due to interest charges.

Your credit card utilization rate, which is the amount of credit you are using compared to your credit limit, is an important factor in determining your credit score. The higher your utilization rate, the more it can negatively impact your credit score. Therefore, carrying a high balance on your credit card can increase your utilization rate and potentially lower your credit score.

• A good credit score means you’re rich.

Your credit score is essentially a measure of your risk as a borrower and reflects how likely you are to pay your debt or utility bills on time and in full. A higher credit score generally indicates that you are a lower risk borrower, while a lower credit score suggests that you are a higher credit risk borrower.

While a high salary doesn’t necessarily guarantee a higher line of credit, updating your income with your card issuer can sometimes lead to an increase in your credit limit. This can be positive for your credit utilization ratio. A higher credit limit can lower your credit utilization ratio, as long as you continue to pay your balance in full each month.

• To get a high credit score, you must earn a lot of money.

While you do need to have enough income to qualify to borrow money and pay it back, having a high income does not necessarily equate to having a high credit score. What’s more important is how well you manage your debt and credit obligations, regardless of your income level.

• My credit score improves after canceling a credit card.

Cancelling a credit card will not remove a negative account from your credit report, and it generally won’t improve your credit score. In fact, cancelling a credit card can potentially hurt your credit score by reducing the total amount of available credit you have, which can increase your credit utilization rate.

• Credit repair companies can improve your credit score.

Credit repair companies can help identify errors or inaccuracies on your credit report and work to have them corrected or removed, which may improve your credit score. However, it’s important to note that not all credit repair companies are legitimate or effective, and some may engage in fraudulent practices.

Additionally, there’s no guarantee that a credit repair company will be able to improve your credit score, as credit scores are based on many factors beyond just the information on your credit report.