Credit & Debt
Avoid these credit myths to get the score you need
These six simple truths could help you improve your credit health.
People tend to get anxious about their credit scores, and that's not surprising. These scores can seem mysterious. And there are so many myths about how they're calculated, what lenders look for and what can cause a high score to tumble.
With that in mind, here's a list of some of the most common credit myths—and the realities about where your credit score comes from, how to protect it, and how to get yourself in shape to apply for a loan.
Myth 1: Checking your credit score and/or report will hurt your score
OK. Checking your credit won't hurt your score. This myth stems from confusion about the difference between a "hard" and a "soft" credit score inquiry. A "hard" inquiry, which a lender undertakes after you apply for a loan or a new card, tends to temporarily bring your score down a few points.
On the other hand, when you check your score, it's treated as a 'soft' inquiry and doesn't have an impact. In fact, Jeff Richardson, spokesperson for credit scoring company VantageScore, suggests checking your credit score frequently, even monthly. "That way, you actively understand your credit health and can learn ways to improve it," he says.
You can check your credit score for free via Chase Credit Journey.
Myth 2: Closing credit card accounts helps your score
It may sound counter-intuitive, but closing down credit card accounts can actually hurt your score. If you have several open credit accounts and a history of making payments on-time, then you have an established positive record. So, while you may have a lot of available credit, you've also demonstrated that you're likely to take care of it. When you close those accounts, you cut your available credit and start erasing your record.
Here's how it works: Imagine you have three open credit cards, each with a $5,000 limit and no balance. If you close down one card, your available credit drops from $15,000 to $10,000. "Your score will decline because the model no longer calculates the credit history or the available credit associated with that card," says Richardson. And if you've never missed a payment on that card, then canceling it means your positive history also disappears.
Myth 3: All debts have the same impact on a score
Not all debts are the same, and credit agencies weigh some debt higher than others. As Richardson notes, a missed credit card payment might signal that you were forgetful due to family, travel, or work. A missed mortgage payment, on the other hand, might signal financial pressure.
You might find that a missed mortgage payment could cost you 10-20 points more than a missed credit card payment. Keep in mind, if you think you're going to miss paying any of your accounts, it's important to talk to your bank or lender.
Myth 4: The higher your income, the better your score
Not true. Your credit score interprets how you've treated your credit obligations in the past, and your income has no direct bearing on that history. No matter how much you make, maintaining your loans, cards, and other accounts and paying your bills on time still requires diligence and discipline.
What your income can affect is how much money a bank chooses to lend you. But Richardson says income doesn't make it into your credit file and won't improve how you score.
Myth 5: Not using credit cards can help your credit score
You might think that not having a credit card is a corollary to good credit. Although it's true that you don't need a credit card to build a credit history, but it doesn't follow that avoiding credit cards altogether will help improve your credit score. Using credit and paying cards on time can in fact help you build a positive credit history.
Here's why: Lenders look at your credit history to determine if you're credit-worthy. If you have no credit history, scoring models might determine that you are "unscorable," which will make you unattractive to lenders. On the other hand, if you have a history of on-time bill payments, it indicates to a lender that you're likely to make your loan payments on time. Having a credit card and paying it on time can help you establish that history.
Myth 6: Lenders report all late payments to credit bureaus
Most lenders report late payments, but Richardson says you shouldn't assume creditors will instantly report you the moment your payment is overdue. Lenders typically don't report late payments until 30 days past a bill's due date.
That said, credit history, which includes how promptly you pay your bills, is the most important factor in your credit score. An easy fix is to set up reminders and notifications on your mobile phone to avoid late payments. If you miss a payment by a few days, quickly pay it.
Remember, don't be afraid to ask. Whether you need to find out your score, schedule a payment, or open a line of credit, talking to your lender or credit agency becomes the first step toward getting the help you need, and building the score you deserve.
D G McCullough is a Wisconsin-based reporter, focused on social and business trends. Her work has appeared in the Guardian, the Economist, and the Financial Times.