12 Credit Score Myths That Could Be Impacting Your Credit Journey
Learning about and managing your credit can be an important part of taking control of your personal finances. And fortunately, you can find lots of information about how credit works online. However, some misconceptions about what credit scores are and how they work have persisted for years. Let’s squash those myths and help you become a real credit master.
12 common credit score myths:
1. Myth: A credit score determines your value
Companies and people might say your credit score is like a grade for your overall personal finances. Somehow, it reflects how you manage personal finances in general, or even how responsible you are in other aspects of your life.
Truth: Credit scores predict a specific risk
Most credit scores are designed to do one specific thing — predict the likelihood that someone will miss a bill payment by at least 90 days in the next 24 months. And many people have poor credit because of a mishap, such as a medical emergency or getting laid off, that wasn’t in their control.
2. Myth: Credit bureaus determine your credit scores
There are three major credit bureaus: Equifax, Experian, and TransUnion. These companies collect and organize information about consumers’ credit accounts, and they create your credit reports. However, they don’t determine your credit scores.
Truth: Credit scoring agencies create credit scores
When a company buys your credit report from a credit bureau, it can also purchase a credit score based on that report. The credit scoring model then analyzes the credit report to determine a score.
3. Myth: You have “a” credit score
Many people think about their credit score in the singular — a number that ranges from 300 to 850. However, credit scores depend on two things, the underlying credit report and the credit scoring model. As a result, you can have more than one credit score.
Truth: There are many different credit scores
FICO and VantageScore both develop commonly used credit scoring models. FICO creates dozens of models, and VantageScore has four. Creditors may also develop their own proprietary credit scoring models. And your three credit reports are often different. As a result, you could have dozens (or hundreds) of different credit scores.
4. Myth: Your credit scores are always changing
It might feel like your credit scores are rising and falling, just waiting for you to see where they’re at. But that’s not actually how it works.
Truth: Credit scores are a one-time snapshot
When someone requests a credit score, a credit bureau has to create a credit report first. Then, the scoring model can score the report. Even if you use a credit monitoring program that doesn’t give you access to your credit report, a new credit report gets created every time the score updates.
5. Myth: Checking your credit hurts your scores
If an organization asks for your permission and requests your credit report when you apply for a new credit account, a record of the request is added to your credit report. These are called hard credit inquiries, hard checks, or pulls, and they might hurt your credit scores a little.
Truth: Checking your credit doesn’t affect your scores
Checking your own credit reports and scores results in a soft inquiry, and these never affect your credit scores. Soft credit checks can also happen when you get preapproved for a new account or if someone checks your credit for a non-lending purpose.
6. Myth: Your income affects your credit
It makes sense to think that your income could affect your credit scores because it affects your ability to repay a debt, but it actually doesn’t.
Truth: Income affects creditworthiness, but not credit scores
Your credit scores only consider the information in your credit report, and your income isn’t part of your credit reports. Creditors will often ask for your income on an application and consider it when making a decision. But it’s not part of your scores.
7. Myth: Actions change your credit scores by a certain number of points
It’s tempting to think that a late payment will hurt your credit scores by X points, or that paying off a debt will increase them by Y points. Credit scoring isn’t that simple.
Truth: You won’t know the exact impact of different actions
Credit scoring models consider a lot of information from your credit report, and the impact of one change will depend on what else is in your report. For example, a new late payment might lead to a larger score drop for someone who has a good credit score than someone with bad credit.
8. Myth: Carrying a credit card balance helps your credit
People sometimes confuse their current credit card balances with their credit utilization ratio, which could be why they think carrying a balance is good. A low credit utilization rate can indeed be better for your credit scores than having high or no utilization. And that credit utilization measures the percentage of your revolving accounts’ available balance that you’re using.
Truth: You can have low utilization and pay your balance in full
Most credit card issuers report your credit card account’s balance and credit limit around the end of each payment period — approximately three weeks before your bill’s due date. That’s what gets added to your credit report and determines your credit utilization rate. As a result, you can pay your bill in full to avoid paying interest on your purchases and still have a low utilization ratio that helps your credit scores.
9. Myth: Closing a credit card lowers the average age of your credit accounts
You might think that credit scoring models won’t consider your closed accounts when calculating the age of your credit accounts. However, accounts that were in good standing when they were closed can stay on your credit report and affect your credit scores for up to 10 years.
Truth: Closed accounts still affect age-related credit score factors
Closing an account can affect your credit scores in a few ways. For example, the account might not affect your utilization rate or credit mix any longer. However, credit scoring models still consider closed accounts in age-related scoring factors, such as the age of your oldest account and the average age of all your accounts.
10. Myth: Paying collections removes them from your credit report
Similar to closing a credit card or paying off and closing a loan, you might think (and hope) that paying off or settling a collections account will remove it from your credit report. It won’t, although it still may be a good idea.
Truth: Paying off collections can help your credit scores, but they stay in your credit history
Some credit scoring models ignore paid-off or settled collection accounts, which can help your credit scores. But closed accounts that were past due can stay on your credit report for seven years after the very first late payment that led to the closure.
11. Myth: You have to pay fees and interest to build credit
Many credit-builder loans and cards are loaded with fees and high interest rates, and these options sometimes get listed as the “best” picks.
Truth: There are ways to build credit without paying interest
Companies get paid to advertise high-fee loans and credit cards. But you can find credit-builder loans, secured cards, and credit-builder unsecured cards that don’t have fees or require you to pay interest.
12. Myth: You’re stuck once you have bad credit
It could take months or years to build your credit from a very low score to an excellent score, and it might feel like nothing you do helps.
Truth: You can improve your credit
The impact of negative items diminishes over time, and most negative items fall off your credit report after seven years. In the meantime, adding to your positive payment history can help your credit.
Ava offers a credit-builder loan and card without fees or interest. Members get access to both types of credit accounts without a hard inquiry, and most members see an improvement in their credit scores in less than seven days.