7 common credit score myths that can cost you thousands of dollars

7 common credit score myths that can cost you thousands of dollars

Almost 4 in 10 Americans have no idea how credit scores work – here’s how to beat the odds.

Many U.S. credit card holders know little about their scores, some never checked them at all and others still believe in fairly common myths about what affects their scores.

Here are seven credit score myths explained and debunked:

Checking your score hurts

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Keeping an eye on changes in your score or report can help you spot errors, track your spending habits, and figure out how to improve your credit, but few Americans are taking advantage of it.

In fact, only a third of Americans checked their credit score in 2020, according to a CompareCards survey from Loan tree.

The fact of the matter

Checking your credit score or report counts as an “indirect inquiry”, which means it will not affect your score.

You may be able to verify this with your credit card issuer, or get it for free from an online provider. It is a good idea to monitor your credit score regularly.

However, when you apply for a loan or a new credit card, a lender will want to check your credit score to determine if you are a reliable borrower. This particular check counts as a “firm investigation” and will your score by a few points, temporarily.

You only have one score

Personal social credit score for each person

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There are over 1,000 credit scores in use today.

Contrary to popular belief, you have more than one score and it can vary slightly depending on the credit bureau providing the information.

When lenders check your credit score, they can extract any of your points – you have no way of knowing which one.

The fact of the matter

The three national credit reporting agencies are: Equifax, Experian, and TransUnion. Typical credit scores range from 300 to 850, and credit bureaus typically take the same factors, such as payment history, usage rate, and number of credit products, into account when determining your score.

However, agencies may use different scoring models and may receive different information when assessing your credit. The two most common models in the United States are FICO and VantageScore.

Your credit card issuer, for example, may use a different model from a third party an online service.

The higher your salary, the higher your score

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A big salary doesn’t necessarily equate to a good credit rating (although it can certainly help).

Credit scores are assessed based on whether you’ve paid your bills on time, how much credit you’ve used over your total limit, how long you’ve had credit, and your credit mix.

The fact of the matter

Your income is not included in your credit report, nor is it taken into account in your credit score. That said, if you are more financially stable and have been able to pay your bills in full on time, you are more likely to have a better credit score.

And lenders will assess your credit score as well as your income and employment status when you apply for credit products.

If you think it’s time to look for a new, better paying job, you can search using a free job site for positions within your industry.

If you’re struggling to make ends meet, think turn your talents and hobbies into a side-gig to increase your income.

Having a balance on your credit card improves your score

Hands holding plastic credit card and using laptop.  Online shopping concept.  Toned image

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The average balance of Americans on three credit cards was $ 5,897 in 2020, according to Experian.

While it’s important that you actually use your credit accounts, paying your monthly bills in full is the best way to maintain a good credit rating. Making payments on time also helps your score.

The fact of the matter

The general rule of thumb is to keep your credit utilization rate below 30% on all of your accounts if you can.

When you make the minimum payments instead of paying off your balance in full each month, you earn interest. If you also continue to shop, your credit usage rate – which divides your credit card balances by your credit card limits – increases accordingly, hurting your credit score.

A 0% utilization rate won’t help you either – lenders want to see that you are using your credit responsibly.

If you find yourself stuck with interest and credit card debt, consider a debt consolidation loan to consolidate all your debts into one loan with a lower interest rate or you can consider a credit card with balance transfer.

Closing a credit card helps your score

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More than 1 in 10 U.S. cardholders think canceling a credit card improves your credit score, and 3 in 10 don’t know what the effects are, 2019 study finds The bank rate investigation.

The study found that over 60% canceled a credit card and the reasons varied, from their cards no longer being useful to battling high interest rates to improve their credit score.

The fact of the matter

Here is the thing. Your credit score improves when you have a good variety of credit accounts, including cards.

So when you close a credit card, you are more likely to hurt your credit score than it is to improve it.

That doesn’t mean, however, that you should never close a credit card. If you haven’t used it very often and are paying a high annual fee, there’s no point in keeping it alive. Switching to a card with lower fees or no fees could also be beneficial.

A potential employer can see your score

Woman at a job interview.

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94% of companies perform background checks before hiring new employees and 38% perform credit checks for certain candidates and positions, according to a survey by the Professional Background Screening Association.

However, employers do not have access to your credit score.

The fact of the matter

A future employer may want to check if you are in financial difficulty, which is why they might ask for a limited version of your credit report. This check counts as a “soft request” so as not to damage your score.

The amended report will show your name, address, Social Security number, and information about your debt, like mortgages, credit accounts, and student loans – so it’s important that prepare for that.

But, they can’t do it without getting your written consent, so don’t worry about them sneaking up behind your back.

You and your spouse share the same score

Couple managing their finances.

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When you get married, you may need to share several things with your spouse, such as a mortgage or grocery bills.

However, you will not merge two partitions into one. Your debts and individual accounts will always remain yours.

The fact of the matter

You and your spouse will always receive separate credit reports and credit scores, even when you combine income or bank accounts.

If your partner has poor credit, it won’t affect your score, unless you jointly apply for a loan or open an account together. This information will affect both of your credit reports.

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