I wrote a few months ago about credit, how it impacts your life, and even how to help your kids build good credit. Since that time I’ve had people tell me some of the craziest “truths” they believed about credit. I bet there are some on this list you believed as well.
Checking my credit report will lower my score
This is false. You can check your credit report as many times as you want either directly through the credit bureaus or through annualcreditreport.com without it affecting your score. Think of it this way – if a mortgage company or a credit card company pulls your credit, the credit bureau knows you have applied for a loan. That means they will consider you a higher risk since – if approved – you will have more debt. When requesting your own credit report, there’s not that direct tie-in to an upcoming loan application. You might be checking your credit report before applying for a loan or just because you want to make sure there’s nothing fishy going on.
Credit bureaus are offering free weekly credit reports until April 2021 due to the COVID pandemic.
Carrying a balance on my credit card month-to-month will help my score
This is also false and can result in you paying exorbitant interest rates for your purchases. In effect, this could lower your score since your utilization remains higher if you carry a balance. You should aim to pay off your credit card bills in full every month.
As long as I pay my credit card in full, my credit score will keep improving
While that seems true from the paragraph above, it’s actually not. Yes, you need to pay your bills in full. But if you continually max out your card month-to-month, the credit bureaus see that as risky because you obviously need all of your available credit to maintain your life. What they want to see is that you use only a little of your available credit (no more than 30%) and pay that off in full every month.
Closing credit card accounts can’t hurt
Whether you decide to close your credit card account or the bank does because you’re not using it, you could lose some points off your credit score. In addition to utilization, credit bureaus look at how long you’ve had credit: the longer, the better. So if you got a card just out of college that you’ve had for 25 years, instead of closing it consider putting a low-priced subscription on it or charge your morning coffee once per month. Keeping it active will help your credit rating.
Naturally, if you’ve gotten in trouble with credit and can’t manage the temptation, close that card and work on rebuilding your financial life. It’s better to close it than to charge it to the max and default on it.
As I make more money my credit score will rise
Your income actually has no direct relationship to your credit score. The credit bureaus don’t care how much you make per year, they simply want to see that you’re managing whatever credit you have in the bast manner possible. Now, if more money means that you will pay off your cards in full and keep utilization under 10%, then yes, your income could have an indirect positive effect.
When I check my credit score, I’m seeing what lenders see
Actually no. In addition to the educational credit score you see, each credit bureau gathers credit information a little differently. Your score will differ by several points (or more) among the three. Plus there are FICO scores (both FICO 8 and FiCO 9) and Vantage scores. In addition, credit card companies receive a different score than when you’re applying for an auto loan. The key here is that if you manage your credit to keep your educational score in the higher ranges, the other scores should follow suit since they are all based on your credit report.
Every payment I make is reported to the bureaus
While mortgage payments, auto loans, and credit card payments are reported to credit bureaus, utility bills, debit card payments and everyday things such as traffic tickets or library fines are not. Well, let’s asterisk that: unless your payments are late and go to a collection agency that reports them. So if you fall behind or run out on the power bill, it may show up in your credit report.
With a good score I’m set for life/With a bad score, I’m doomed for life
Both of these can be true or false. If you build a good score and continue making the same smart choices, then you should have good credit for life. Same with bad credit and bad choices. However, good can turn bad with a few bad decisions, and can happen much quicker than you’d think possible. Similarly bad credit can turn good, but it’s a much slower process. The key here – build a good score and keep it.
I should increase the limit on my credit card to help the utilization ratio
This is true, as far as it goes. If you have a credit card with a $10,000 balance and you’re charging $5,000 per month, you have a 50% utilization ratio. Increase that card limit to $20,000, and suddenly you’re under the 30% target. However, the downside is that with this higher limit, you can’t start charging more just because. If you will end up spending more than you can afford, it might be best to decline the offer of more credit.
I paid off my credit card that went to collection, so my credit score should jump back to the previous level
Ah, not so fast. Paying off debt that’s gone to collection will end up helping your credit rating. However, it’s not an instantaneous event. Most negative information is removed from your report after seven years. Don’t panic – that doesn’t mean you’ll have to wait the full seven years to see a positive effect on your report. Paying on time, low credit utilization, etc. will help your score over time.
If I’m not applying for a loan, I don’t need to check my credit
This is another true and false. Your credit score doesn’t really matter if you aren’t applying for a loan. But your credit report? That’s another story. You should check your credit report periodically (at the very least once per year) to ensure the accounts listed are in fact your accounts and that the information about you is correct. Checking your credit report regularly is one of the best ways to discover if someone has stolen your identity. And even if it’s a minor reporting error, getting anything changed through the credit bureaus can be an exercise in frustration. Doing so before you need credit will only make the process smoother.
Photo by John Hain