Knowing how credit scores work can help ensure yours is the best it can possibly be.
Over the years, a number of misconceptions have crept into popular knowledge surrounding this topic. Let’s take a look at some of the most prevalent to set the record straight.
So, here’s a list of the top credit score myths — debunked.
#1 Your Credit Score Can Cost You a Job
While some employers do pull credit reports when they’re considering a candidate, the one they get typically has your personal information, including your actual score redacted. Further, they must have your permission to do so and it cannot be shared with other employers.
Additionally, this type of inquiry has no effect on your overall score. Granted, the details of your history go toward the makeup of your score, but your score alone is not a determining factor, only your history.
#2 Closing Old Accounts Improves Your Score
This can actually have the exact opposite effect. One of the criteria by which your score is established is the length of time an account has been open. A longstanding one with a good payment history boosts your score.
Closing an old account you’ve always managed well could diminish your score. Conversely, closing an old account you’ve managed poorly will not improve your score. That poor performance is already reflected.
#3 Your Income Factors into Your Score
While your income may play a role in a lender’s decision to extend credit, it has no direct effect on your credit score. If you pay your bills on time and keep your credit usage to less than half of your limits, your income won’t matter to your score.
However, if things get out of hand and your income won’t let you reel it in — then yes — that’s a problem. However, this is more of a function of how you manage your credit than it is your income per se.
#4 Debt Settlement Ruins Your Score Forever
While it’s true that your credit score will take a dip when you enter a debt settlement program, the resulting change in your score is far less precipitous than when you file for bankruptcy protection. This makes it easier to rebuild your credit on your own once the program is complete.
Legitimate negotiation companies like Freedom Debt Relief will disclose this right upfront. Meanwhile, any settlement company promising to improve your score right away is up to no good.
#5 Checking Your Own Credit Will Lower Your Score
Credit inquiries fall into one of two categories — “hard” and “soft”. A hard inquiry occurs when a lender asks for a copy of your report to inform a lending decision. A soft inquiry is logged when you ask to see your own report.
You are entitled to see a copy of your report each year for free at AnnualCreditReport.com. Soft inquiries do not figure into the calculation of your score.
#6 Shopping for Interest Rates Reduces Your Score
While each application you submit to a creditor for which a report is requested technically qualifies as a hard inquiry, reporting agencies to consider a cluster of requests for the same type of credit within a short time period to be just one.
They know you’re looking for a deal and will not downgrade your credit score for doing so.
#7 Carrying a Balance from Month to Month Improves Your Score
The better your record of paying off balances in full, the higher your score will be. Credit utilization is one of the factors comprising your score. The lower your utilization, the higher your number. The best play is to only use your accounts occasionally and pay them off in full before the grace period ends and interest charges accrue.
That way, you’ll get the benefit of a pristine history without the extra expense of interest payments.
Have you ever heard these myths?