15 Credit Score Myths Revealed Here
According to Abraham Lincoln, "not everything you read on the Internet is true." This common meme is really silly, but it makes a good point. Especially in our highly technologized world, there is an abundance of information available at our fingertips. While this can be great and in many cases useful, it is important to not necessarily believe everything that you read. There are many myths out there, about a range of topics. Here we will discuss 15 credit score myths that you may have heard.
15 Credit Score Myths Revealed
There are many credit score myths circulating, but we will just go over some of the most common credit score myths here. Below are 15 credit score myths that you have probably heard before, as well as the truth that you may not have heard before.
Myth #1: Running My Credit Score will Actually Lower My Credit Score
This is a big misconception people who do not understand the difference between a hard inquiry and a soft inquiry. A hard inquiry, which is conducted by a credit card company or other credit lender, is a credit background check that will negatively impact your credit score -- at least for the short-term. However, if you check your own credit score (or are prequalified for special credit offers), then this is just a soft inquiry, which does not affect your credit score at all.
Do not get scared away from checking your credit score by this myth. Checking your credit score is important, as it allows you to track your progress while building credit. But be careful not to fall for a free credit report scam. You don't need a friend who works for a mortgage broker or car dealership to run your credit score for free; in fact, this will be seen as a hard inquiry because of who is running the credit check. Rather, you have the right to check your credit report for free once a year.
Myth #2: I Have Only One Credit Score
While everyone typically refers to their credit score in the singular, that does not mean that you only have one credit score. In fact, there are several different credit scoring formulas and models. Which credit score a lender looks at will depend on their specific purposes, which will determine which factors are weighted more or less.
There are three main credit bureaus -- Equifax, TransUnion, and Experian -- that lenders like to look at. Go here to get your credit scores and credit reports from all three credit bureaus.
Myth #3: After Getting Married, My Spouse and I Will Share a Joint Credit Score
While you may share finances with your spouse, this does not lead to a joint credit score or joint credit report. Having joint accounts of course means that what you and your partner do from these joint accounts will affect each of your credit scores. However, every individual has their own credit score and credit report, which is linked to your individual Social Security number.
Just because you don't share a credit score does not mean that getting married to someone with bad credit won't affect you and your credit score. Marrying someone with bad credit can affect your credit in several ways. One example is when you decide to take out a joint loan. It may be more difficult to take out a joint loan with someone who has bad credit, so if possible, you may want to take out the loan only in your name.
This does not just have to be a negative thing though. You can help your spouse who has bad credit, by reviewing your credit reports together, making a plan together, and then keeping track of your progress together. Notice the key word here: together. One of the great things about marriage is how you can tackle problems together, and bad credit is just another one of those things.
Myth #4: Getting a Personal Loan Will Hurt My Credit
Many people think that getting a personal loan will hurt their credit. This goes along with the myth that all debt is bad (that's your free additional (16th) myth in this piece). Not all debt is equal, and some debt may even be good; think of student debt, for instance, which is debt but also is an investment in your future. There are many different types of debt, which is why I even created a comprehensive overview of the different types of debt for you.
In this instance, a personal loan can actually help your credit. This is because getting a personal loan can allow you to build a credit history, consolidate your debt, pay off a credit card, and prove your credit trustworthiness. This only works to improve your credit trustworthiness if you actually make the payments in full and on time, every time.
Getting a personal loan with bad credit may be more difficult, but not impossible. In fact, you can even get personal loans with no credit at all. Personal loans for bad credit may be able to help you and your credit.
Myth #5: Closing a Credit Card Will Improve My Credit Score
Just closing a credit card will not improve your credit. It will actually in most instances hurt your credit score. If you are struggling with making all of your payments on time, then you should speak to your credit card company and see if you can figure out a payment plan. But just closing a credit card, especially if it still has a balance, will not solve your problems.
Having a credit card -- or multiple credit cards -- is good for your credit for two main reasons: credit mix and credit utilization. Having a mix of different types of credit positively impacts your credit score, as does having more credit available to you than you are actively using.
Credits, Debt, Taxes and Much More - All in One Place.
Myth #6: Using a Debit Card Will Improve My Credit Score
Debit cards are not the same as credit cards. Debit cards actually do not impact your credit score at all. This is because there is not a "credit" aspect associated with debit cards. Do not get a debit card for the purpose of improving your credit, since it will not help -- or hurt -- your credit in any way. Here is some more information regarding the differences between debit cards and credit cards.
This also does not work by selecting "credit" on the card reader at the cash register when purchasing items at the store. This is because the money still comes from the same place, no matter if you call it "debit" or "credit" for different purchases.
This goes the same for prepaid cards, which also do not affect your credit score.
Myth #7: Paying Off My Debts Will Improve My Credit Score
Paying off your debts is a good thing to work towards, but paying off all of your debts will not automatically improve your credit. It really depends on what kind of debt you have.
Paying off credit card debt will improve your credit. This improves your credit by lowering your credit utilization, which is the percentage you use from the total amount of credit available to you. It is a good idea to pay off your credit card debt anyway, just because of the usually higher interest rates.
Paying off installment debt, on the other hand, will not improve your credit. This does not improve your credit, but rather hurts your credit, because paying off installment debt is decreasing the number of credit accounts you have. This doesn't mean that you shouldn't make your loan payments though, as not paying off your loan will lead to a large amount of unnecessary interest over time.
Myth #8: My Credit Score Doesn't Matter When I'm Young
It is never too early to work on building your credit. When you are 18, you can already start applying for credit. This is when you should begin thinking about building credit and working towards a good credit score. Millennial millionaire Todd Baldwin's "number-one piece of advice to young adults is to start building a credit history as early as possible". This is a good piece of advice, as length of credit history is one of the main factors that affect your credit score.
Don't wait until you are older to worry about your credit score. It doesn't make sense to wait until you are drowning in debt to try to work on improving your credit score. Rather it makes more sense to be conscious about your credit and spending habits when you are young, so that you don't have to spend so much effort catching up later.
Myth #9: Only Rich People Can Have an Excellent Credit Score
Your income does not directly affect your credit score. Income is not one of the factors that affect your credit score. Your credit report will have information on your employment history, but not to see how much money you make; they are more interested in whether or not you tend to have stable jobs, which may indicate that you can afford to pay off your debts.
What does matter is your spending habits. If you have a lower income but make all of your bill payments in full and always on time, then that will affect your credit score in a positive way. On the other hand, if you have an extremely large income but still overspend and cannot keep up with your credit card payments and other debt, then you will not have a very good credit score.
Myth #10: My Credit Score Measures My Value as a Person
A credit score is a three-digit number that is intended to measure how healthy of a relationship you have with money and credit. This score is important for lenders to determine how likely you are to pay off your debts. It is all about risk.
This does not reflect on what kind of a person you are though. Someone with a bad credit score is not automatically a bad person, just like someone with a good credit score is a good person. If you do not have a good credit score, then don't feel bad about yourself. There are ways to improve your credit score rating, but don't stress about how people may view you because of your bad credit score.
Myth #11: My Employer Can Check My Credit Score
Your employer can not lawfully check your credit score. Employers are not allowed to check your credit score while screening applicants because that type of sensitive information could be used in a way that discriminates against potential employees.
Employers may, however, check a version of your credit report that does not have your credit score. The report they can see shows information about your debt and payment history, so that they can spot signs of potential financial distress.
Myth #12: If I Pay Off a Collection Account, Then It Won't Affect My Credit Score
Paying off a collection account is a good idea, but it will not stop that collection account from affecting your credit score, at least not in the short-term. However, in the long-term, paying off a collection will positively affect your credit score.
There are different factors that determine how long different items will stay on your credit report. Many negative marks will stay on your credit report for 7 years, but there are different reasons for how long derogatory marks will stay on your credit.
Myth #13: I Can't Get Approved for a Loan With Bad Credit
It may be more difficult to get approved for a loan with bad credit, but like I mentioned before, it is possible. There are many different factors that lenders and creditors will consider when determining whether or not they want to approve someone for a loan. You may even consider shopping online for a loan with bad credit.
Not only is it more difficult to get approved for a loan with bad credit, but it oftentimes also means that you will be stuck with extra fees and a higher interest rate. These are only a couple of the negative things that bad credit lenders don't want you to know.
Consider the pros and cons for personal loans with bad credit before deciding what the best option is for your situation.
If you are interested in getting a loan, here are some options for you, just put in your information, and you may get suggestions about a potential lender for you:
Myth #14: Taking on More Credit Will Just Hurt My Credit Score More
Taking on more lines of credit will not hurt your credit score; in fact, opening additional lines of credit may even positively impact your credit score. This is because opening an additional line of credit will increase your credit mix and provide you with new credit -- decreasing your credit utilization, which will also positively impact your credit score.
Just be careful about a late payment credit score. If you make late payments, your credit score will be negatively impacted. If it is just one late payment, then it may not affect you in a large way, but if you make a habit of making late payments, then this will have a larger negative effect on your credit score.
Myth #15: I Only Need to Check My Credit Score Before Applying for a Loan
It is true that you should check your credit score before applying for a loan. However, this should not be the only time that you check your credit score. It is important to check your credit score -- as well as your credit report -- once a year, minimum. This is important to track your credit health. If there is something negative impacting your credit score, it is better to know sooner rather than later. The sooner you know about a problem, the sooner you can work towards fixing it.
If you realize that your credit score isn't where you want it, then there are many things you can do to improve your credit score without crying. Sometimes it may feel stressful, but don't let it overwhelm you. You need to be realistic that it will take time to improve your credit score, but that's okay. Don't fall for a scam with someone offering a "miracle" cure to improving your credit score fast. It simply cannot be done overnight.
Of course the optimal situation is not finding any issues during your periodic checks of your credit score and credit report. If anything, checking your credit score and credit report regularly can even just give you a boost, making you feel good for doing well and pushing you to continue utilizing your credit in a wise manner.
Conclusion
In order to maintain a healthy relationship with money, you need to first understand how your credit works. Your credit score is important, especially if you are looking for more credit. Lenders and credit card companies prefer to give credit to people who have higher credit scores. Because of this, it is important not to fall for any of the credit score myths mentioned above.