Busting 7 credit score myths
NOVEMBER 18, 2017 AUTHOR: SHAUN
Don’t be held back financially by believing these money myths! Let’s set the record straight.
As I showed you earlier this week, your credit score is essential when it comes to borrowing money. It can mean the difference between getting approved or denied, and can unlock a lot of benefits for you…
Did you know a history of good credit can save you over $100K in interest over a lifetime? (check out my earlier post to find out how)
It can also give you “elite” privileges. For example, things like access to valuable credit card reward programs and even lower interest rates.
Rather than taking your credit score for granted, you should know where you stand, and work to improve it.
Dare I ask if you know your credit score? Would you know what hurts it? What makes it stronger?
I get it – credit scores are somewhat vague. It’s not a sexy topic, and it isn’t easy to wrap your head around a number that they calculate in a mystery box.
Today’s article will answer the most popular questions related to credit scores. I’ll also dispel some popular myths out there!
Let’s check out seven credit score myths below…
Myth #1 – You have one credit score
Three national credit bureaus in North America report your credit score: Transunion, Equifax, and Experian (US only). They collect information from creditors and build models to give you a credit score.
Believe it or not, despite how technical the work is, you’ll see slight variations in your credit score across all of the three agencies.
There are two good reasons for that.
Since reporting activity to these bureaus is entirely voluntary, you’ll find that not every lender reports to all three. That means they’ll all be working with slightly different versions of data to build your credit score.
And on top of that, each agency uses their own software to calculate credit scores.
Both of these could result in slight variations.
Myth #2 – Having a good salary helps improve your credit score
Surprise, surprise! Your income and occupation have no bearing on your credit score. You could be a multi-millionaire, with a ton of money set aside, and it means nothing to a credit bureau.
That being said, these things are essential to building an overall picture for a lender.
Stability and a good source of income can help your payment potential, increasing your chances of getting approved for a loan. But they have no impact on your credit score.
Myth #3 – My credit score is related to my spouse
This one is only partially right.
Think of your credit score as your driver’s license. You’re responsible for your own record. If you get a speeding ticket, that goes on your record, not your spouse (even if they were in the passenger seat!).
You have your own history that is likely unrelated to your spouse.
The only time they can mirror one another is if all of your debts are shared (or “joint”). That’s because you’re both on the hook and share the payment responsibility equally. If any payment is late in this case, both of you feel the impact.
Myth #4 – Since I don’t have a credit card (or any debt for that matter) I’ll have a good credit score
On the contrary, having a debt product (for example: a credit card, car loan, etc.) that you pay on time will actually give you a better credit score.
In fact, starting out with a small-limit credit card and paying it off every month is one of the best ways to start building good credit.
Lenders want to see that you can handle paying credit regularly. Without having a regular credit product to pay down, how else can you show that you’re credit-worthy?
Sure, you might have the capacity to borrow because you have no debts today, but that doesn’t show you can regularly pay if need be.
Myth #5 – Bankruptcy will hurt your credit forever
Going bankrupt is never a good thing. It should only be used in dire circumstances after you’ve exhausted all of your available options.
It’s very serious and will limit your ability to get a loan.
A bankruptcy note will only remain on your credit history file for 6 to 10 years depending on where you live. After that point, the goal is that you’ve restructured your finances in a way that you can get a fresh start.
That being said, you may still have to disclose if you’ve ever filed for bankruptcy as part of a borrowing application, which may impact the process, but there is still hope to build good credit if this is the case for you.
Myth #6 – Every time someone pulls your credit report, it hurts your score
There are two types of inquiries on your credit score – a “hard” inquiry (done for applications) and a “soft” inquiry (done for educational purposes only).
Whenever you apply for credit, they count it as a “hard” inquiry. These hurt your credit score, but often only by a few points. The system is also smart enough to know that if you’re shopping for a similar product in a short period, you’ll just get docked once.
A “soft” inquiry is when someone is looking into you for educational purposes. It could be for a spectrum of reasons – you might be looking into your own credit score, or a Bank could be doing so before sending you a pre-approval in the mail. Either way, these types of inquiries do not hurt your credit score.
Myth #7 – You should only check your credit history if you think you have a problem, or before you apply for a loan
Sure, both of these are excellent reasons to be looking into your credit score but don’t limit it to that.
It’s good practice to check your credit history at least once a year.
A credit report is a summary of different credit, loan, and payment activities. Think of it as a catch-all document of all debts owed, missed payments, and a list of businesses that have recently requested your credit details. By checking your credit report regularly, you can catch accidents logged on your file. It can also be a good check against identity fraud.
Everyone is entitled to receiving a free annual credit report from each of the national credit bureaus – the law requires it. In fact, AnnualCreditReport.com was created by the credit bureaus in the US as a one-stop-shop for providing you with your annual credit reports. In Canada, you can get it from TransUnion here or Equifax here (under Credit Report Assistance).
A word of caution – these are credit reports, not credit scores. What’s the difference? Your credit report contains all the details they’ve received from you. Your credit score is calculated by plugging the information in your credit report into a credit score formula. So by ordering one of these, you won’t actually see your “raw number.”
So where can you find your score?
You can buy a report with your score directly from the credit bureau, or some banks now have their own apps to help you access it, along with some financial advice to improve your score.
You can improve your credit score with these steps!
Your credit score is fluid, meaning it can change (hopefully for the better!). Granted not overnight, but there are a lot of small steps you can do to help improve it.
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SWP Action Steps
Your credit score is a reflection of how well you manage your financial obligations. And a good score has its benefits, including saving you a lot of money in interest!
If you haven’t had the chance yet, take a look at the post earlier this week where I break down your credit score and show why it matters to you. In it, I also highlight some recommendations on how to improve your credit score.
Why not put a plan in place to be a better borrower! There’s nothing but upside to be had!
Think it through
- How has your perspective on credit changed? Is there anything you’d do differently?
- Are you confident in your credit history? When was the last time you reviewed your credit profile?
- What’s the best thing you can do to build better borrowing habits? (Share yours with us below!)
- The one thing people forget most when budgeting
- How not to overspend and save money
- How to improve your credit score