Common Myths and Misconceptions on Credit Scores
A score determines if I get credit.
A FICO score is simply one of the many factors lenders use to make credit decisions. Lenders look at other factors such as your employment history, your income, and your credit history to determine if you can handle the amount of debt you are applying for. Based on this information and the institution’s underwriting policy, they might extend credit to you even though your score is low, or they might decline your request for credit even if your score is high.
A bad score will haunt you forever.
A score is more of a “snapshot” of your risk and financial situation at a particular point in time. Your score will change as new information gets added to the credit bureau files. Past credit problems impact your current score less as time passes. The opposite is also true; a good score doesn’t last forever if you do not handle your credits properly.
Credit scores are unfavorable to minorities.
Your credit score only considers credit-related information. Gender, race, nationality, and marital status are not factors in your score. The Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit.
My score will drop if I apply for new credit.
While this might be true in certain situations, it probably won’t drop by much. Looking for new credit equate to higher risk, but multiple inquiries from auto or mortgage lenders within 45 days do not affect most credit scores. Typically, these are treated as single inquires and will have little impact on your credit score. However, applying for several credit cards within a short period of time will appear on your report.
Not using your credit card will hurt your score.
An inactive, but open card will not affect your score one way or another. However, having a 0% credit utilization on your revolving accounts can look bad for the current month. Since credit utilization does not carry history and only counts for the most recent statements from your financial situation.
Some banks will also close accounts that have been inactive for 6 months or longer. This can bring down your credit score since it will also bring down your Age of Accounts. Read our article on “What Goes into Your Credit Score” for more information.
You need to stay within a certain percentage of your credit limit each month.
Some of the best scores only have a credit utilization between 1 and 10%. However, credit utilization does not consider history. Your credit score cares more about bills being paid on time rather than the amount paid on revolving accounts.
You should take out a loan and pay it back to boost your score.
It is always discouraged to take out loans you don’t intend to use. Credit mix is only 10% of your FICO score, it is not worth paying loan interests for a potential small increase in your score.
Checking your own credit will hurt your credit score.
You are entitled a free annual credit report every 12 months, as required by federal law. Moreover, FICO recognizes that you are not seeking new credit when you check your own credit score. So checking your own credit will not decrease your score. Using monitor systems like CreditKarma [affiliate link] or Quizzle [affiliate link] are considered to be soft inquiries.
The higher the score, the better.
This is a fact. The higher your score is; the better rates you will get on loans. A score of 750 or above will get you the most competitive interest rates on loans.