Your credit score plays an important part in your life. Whether you realize it or not, that three-digit number can impact whether you are hired for a job, the interest rate on your credit card, and even your mortgage payment. Yet, around 40 percent of Americans never bother to check their credit ratings, and many people simply don’t understand how credit scores work.
Let’s put a stop to that. Here are five of the biggest credit score myths, and the truth behind the lies.
Credit Score Myth 1 -You Only Have One Credit Score
One of the biggest credit score myths is that each person only has one credit score. The reality could not be further from that misconception. The truth is that each credit reporting agency has its own method for calculating your credit rating, and many lenders have their own system, too.
There are three main credit reporting agencies — Equifax, Experian and TransUnion – but they aren’t the only ones in the game. There are lots of credit reporting agencies in the United States. Then, there are the companies like FICO and Beacon that have their own systems for figuring your credit score. The worst part is that, depending on the algorithm each one uses, your credit score could vary significantly.
Credit Score Myth 2 – The Fewer Credit Cards You Have the Better
Another popular credit score myth is that the fewer credit cards and loans you have, the higher your credit score will be. People, believing the lie, close their accounts and pay off loans early in an effort to boost their credit scores, but when the dust settles, their credit scores are often lower than they were before they closed those accounts.
The reason comes down to the amount you owe relative to the available credit you have. It is called credit utilization, and it has a major impact on your credit score. If you close your accounts, the amount of available credit you have also goes down and your credit utilization rate increases in response. In turn, your credit score takes an unnecessary hit. Ideally, you want to have a large amount of credit available and be using a small percentage of it.
Credit Score Myth 3 – Your Credit Score Is Affected by Your Income
The idea that your credit score is impacted by your income is a common myth, and it couldn’t be more false. Your credit score is calculated using many different factors. Whether you have paid late or missed a payment, how much you owe, your credit history, the number of new accounts you’ve opened, and the types of credit you carry all figure into your credit score to varying degrees. Income is not part of that picture.
While a creditor or lender may use your income in tandem with your credit score to make a decision about whether to grant your loan or allow you to open a credit card, if someone such as your insurance company or a potential employer runs your credit score, your income does not come into it. In fact, credit reporting agencies do not even have access to that information.
Credit Score Myth 4 – One Late Payment Isn’t a Big Deal
The mail gets lost. You misplace your statement. The dog eats your bill. Late payments happen. However, they have a bigger impact than you might expect. “Payment history is typically the single largest factor in a credit score,” explains Discover. Your payment history makes up about 35 percent of your credit score, and some places may weight it even higher – the penalty can be severe. According to Discover, “Missing one payment could wind up on your credit report for up to seven years. What’s more, in the short term, it can drop your score by more than 100 points.” That’s enough of a drop to cost you an opportunity or at least qualify you for a far less advantageous interest rate.
Credit Score Myth 5 – Your Credit Score Is Accurate
One of the most dangerous myths about your credit score is that it will always be accurate. After all, why check your credit score if you can’t change it? As it turns out, there are some pretty big reasons to keep an eye on your credit score.
According to a 2013 study by the Federal Trade Commission, “one in four consumers identified errors on their credit reports that might affect their credit scores,” and for around 5 percent of people, those errors were significant enough to result in paying higher interest rates. The FTC also found “slightly more than one in 10 consumers saw a change in their credit score after the CRAs modified errors on their credit report.”
Moreover, the study found that one out of 250 people had an error on their credit report that resulted in a change of over 100 points after the inaccuracy was corrected. It is for this reason that the government allows you to check your credit report from each major credit reporting agency once a year. It is also the reason that so many companies provide assistance in correcting credit report errors.
With this much misinformation out there, it can be hard to know what to do about your credit score. You need a trusted adviser who knows what goes into a credit score, as well as how to correct errors in your credit report. Ovation Credit Services can help you make sure your credit report is accurate and provide you with the guidance you need to improve your score and reach your financial goals. Contact us today for a free consultation.