Ignorance may be bliss, but not when it comes to your credit score. Lack of knowledge, or knowledge that’s inaccurate, can damage your credit score, which will cost you money in higher interest rates or keep you from obtaining new credit when you need it. Arming yourself with some financial knowledge, and understanding what’s true and what isn’t when it comes to your credit score, will always pay off.
Your credit report is a record of what you have for credit and how you pay your debts, and your score, or credit rating, is a measurement of that. If you make your payments on time and don’t take out excessive credit, your score should be quite good.
Misinformation is a huge problem these days, and the more you arm yourself with accurate information, the better your financial health will be.
1. As long as one of my credit scores is good, they’re all good
There are three credit-reporting agencies: TransUnion, Equifax, and Experian. Each agency may have different credit information reported to it, so your credit report from each one may be different, resulting in different scores. Your score is calculated using only information reported to that particular credit agency. While you’ll have different scores with the different agencies, FICO is used by 90% of all lenders. FICO scores range from 300-850.
2. Getting rid of my credit will give me a higher score
Your credit score is based on your credit history. If you pay off all your debt, that’s great for you, but potentially not so great for your score. Over time, closed accounts and payment histories will drop off your report. You’re judged on your last two years of payments on each account, and without those ongoing accounts, your report could be light. People just starting out on their own who are applying for their first credit card often think they have an excellent credit score. Unfortunately, with no credit history to look at, there’s little to judge, so your score will be lower.
Some credit card companies and other lenders are willing to lend small amounts of money to people with little or no recent credit history, but it’s not easy to find them. Therefore, even if you pay off an account, it’s best not to close it entirely if it’s your only account. This way, you’ll always have an active account in good standing.
3. If I have a higher income, I’ll have a high credit score
The credit bureaus don’t look at your income when determining your score. Lenders, however, do consider your income as part of your ability to pay back the loan when determining their risk of lending to you. By calculating your debt-to-income ratio, they can assess whether you’ll be able to pay back the debt. This, in turn, contributes to how much credit you’re using and your credit history.
4. My college degree will help increase my credit score
Sure, your college degree may help you get a job with higher pay that can help you make payments on your debt, but the credit bureaus don’t care about your education. In fact, it can be difficult for college graduates to maintain a good credit score if they’re saddled with lots of debt from student loans.
5. My bad credit score will keep me from getting a job
This myth is partially true. Some states have made it illegal for potential employers to consider a person’s credit when he or she applies for a job, while others strictly limit the usage. In the rest of the states, companies can consider your credit history, especially if the job is in the financial sector, if you’d be handling cash as part of your job, or if you’d be performing accounting duties. Many employers who do check your credit will give you a chance to explain why you have bad credit.
1. Making regular, on-time payments to my creditors will greatly improve my credit score
It does! While the formula the credit-reporting agencies use in calculating credit scores is about as easy to understand as it is for a snail to understand quantum physics, the agencies do explain what they’re looking at in determining your score. By focusing on those factors, you can raise your score significantly. Your Credit History accounts for about 35% of your score. Amounts Owed accounts for 30%, while your Length of Credit History accounts for 15%. New Credit and Mix of Credit (variety of credit, such as credit cards, mortgage, installment loans, etc.) each make up 10%.
2. My credit report is free
It is! You’re eligible for one free credit report from each of the three credit-reporting agencies once every 12 months. You’re also able to receive a free copy of your credit report if you’re denied credit because of information on your report. You can get these at www.annualcreditreport.com. Keep in mind that these are consumer credit reports, meaning they don’t contain scores. However, they do have all the credit information that lenders use when making their decisions. You should check yours at least yearly to make sure that nothing has been put there erroneously that could be affecting your credit score. You can dispute any incorrect entries with the bureaus, and if they find that the file is incorrect, they’ll update it.
3. There’s a way to fix my credit report to get a good score
There is, but it’s not a quick fix. Some companies claim to be able to fix your credit reports and have any negative information removed. What these companies really do is dispute errors on your report with the credit bureaus, which is something you can do for yourself for free. Incorrect items will be fixed, but if you have negative information on your report that’s accurate and really yours, it’ll stay there for quite a few years. A credit repair company can’t remove accurate negative information. More information related to your credit score can be found in this easy-to-understand resource from FICO.
Fixing your credit report is as simple as assuring its accuracy yearly and making your payments on time. However, if you stay on track and make responsible financial choices, you’ll have the freedom―and the credit scores―to be able to make credit decisions that are beneficial to you.