There are so many myths and misunderstandings when it comes to credit reports and scores. Not understanding how they work could have a negative effect on your creditworthiness, which can cost you money in higher interest rates on loans.
Here is a list of seven common misconceptions about credit scores and the real deal behind them.
1. Myth: Closing Credit Cards Will Improve My Credit Scores
Fact: Closing many cards at once can have a negative impact on your score because it can lower the ratio of your debt to your available credit. This is also known as your credit utilization rate and is a major factor among credit scoring models. For example, if you have $20,000 in debt and $30,000 in available credit, and closing a few cards drops your available credit by $8,000, your debt-to-credit ratio will have changed — and not for the better because you ideally want to stay below 10% of your total available credit limit(s).
It is absolutely OK to close credit cards (and if you’re overspending, it could be a good idea). Just try to avoid closing too many in a short period of time. Instead, consider paying off the balances and putting them away so you are not tempted to use them.
2. Myth: Opening New Credit Will Badly Damage My Score
Fact: Applying for new credit may lower your score by a few points by generating a hard inquiry on your credit report. But in many cases, so long as you’re not applying for lots of new credit lines at once and using your new credit responsibly, it can have a positive impact on your score in the long run.
3. Myth: Checking my Credit Will Lower My Score
Fact: No! Checking your own scores will have no impact on your credit. This is because it is considered a soft inquiry. You can check your own credit reports as often as you’d like, although you can only get a free report once per year from each bureau. (You can also get a free credit report summary, updated each month, on Credit.com.)
4. Myth: My Income Affects My Credit Scores
Fact: Your income may affect your ability to pay your bills and how much debt you can take on, but the amount should have no effect in and of itself on your credit scores. Your current and past employers may appear on your credit reports, but your income generally will not.
5. Myth: Bad Credit Never Goes Away
Fact: Not true! If you pay off delinquent accounts and use your credit responsibly, you will likely start to see your scores improve over time. Credit scores are essentially a live snapshot of your current financial status and can always go up or down. Generally, bankruptcies stay on your reports for 10 years, while other negative information will appear for seven years, but their impact on your score will lessen over time — and you can improve your scores by instituting and maintaining smart spending habits.
6. Myth: My Personal Bank Account Has an Impact on My Score
Fact: Your bank accounts are not directly linked to or listed on your traditional credit reports. However, it is important to make sure accounts are closed properly and fees do not remain charged to your account, as unpaid fees can end up at a collection agency — and collection accounts can appear on your reports.
7. Myth: I Pay my Bills on Time, so I Must Have Good Credit
Fact: Paying bills on time is a very important aspect of maintaining good credit, but other factors also come into play when building and maintaining good credit. Your payment history, the amount of your debt, the age of your credit history, new credit inquiries, and the types of credit accounts you have are all factors among credit scores. Missteps in any of these categories can lower your score, even if you always pay your bills on time.
Leslie Tayne, Esq., is a consumer and business debt-related attorney and advisor. She founded Tayne Law Group, P.C., concentrating solely in debt resolution and alternatives to filing bankruptcy for consumers, small business owners and professionals. In addition, Tayne Law regularly consults and advises on debt management related issues. Her book, Life & Debt, shows how learning to embrace your debt can help you not only like it, but love it. More by Leslie Tayne