Busting Some Myths
If you watch the Discovery channel as much as I do then, you’re probably a “Mythbusters” fan. And, if you’re as much of a fan as I am, then you’ve learned the truth about heated Jawbreakers exploding in your mouth, or you won’t lose your head if you happen to forget to turn off the ceiling fan while changing a light bulb. While all of this might be great fantastic cocktail party conversation, these little factoids probably won’t help you improve your personal finances.
However, what will impact your wallet is what you may, or may not, know about your credit score. Your credit score is a triple digit representation of your credit worth, or how likely your are to pay back money you borrow. It may seem pretty easy, but credit scores aren’t always intuitive. And that’s the rub, even when you think you’re doing the right thing for your finances, you may actually be shortchanging your credit score.
[Free Resource: Check your free credit report and score]
Let’s get down to business, here are the top 10 credit score fictions on which you need the facts…
1. More Money Earned Means Higher Credit Scores
The fact of the matter is your income has absolutely nothing to do with your credit score or credit report. Remember, your credit score is a reflection of your ability to pay your bills on time, not a representation of the state of your wealth.
2. Once You’ve Settled a Debt It Drops Off Your Credit Report
Unfortunately, bad information, late payments and other dings on your credit report linger for up to seven years from the initial date of the “infraction”. Bankruptcies are another matter and tend to stick around for 10 years from the filing date. While these kinds of black marks continue to sully your credit report, their affect on your credit score will be reduced over time once corrected.
3. Credit Bureaus are Accurate All the Time
It may surprise you, but MOST credit reports contain a serious error or some type of mistake – eight in 10 in fact. Read this survey by the U.S. Public Interest Research Groups. This is why we’re always preaching about checking your credit report regularly and dispute inaccuracies as you find them. To take a look at your credit report and score for free, and dispute credit report errors online, visit Quizzle.com.
4. Cash-Only Policies Will Help Your Credit Score
In order to have good credit you have to use credit, and use it responsibly. If you don’t have credit cards, loans or other mechanisms by which credit bureaus can judge your ability to repay debt.
5. Credit Reports and Credit Scores are the Same Thing
There are three credit reports that matter – your Experian, Equifax and Transunion credit report. There are so many different calculations of your credit score it would take to long to list them all. As a matter of fact even FICO has more than 40 different versions. As such, the information on your credit reports add the resulting credit scores can vary – sometimes widely. One is not better than other, lenders use different scores and reports for different reasons. What does matter is how you manage your credit and build a solid credit history.
6. Managing Your Checking, Savings & Investment Accounts Impacts Your Credit Score
This works the same way income does. Your checking, savings and investment accounts are not reported to the credit bureaus and will not impact your credit.
7. Closing Your Credit Card Accounts Improves Your Credit Score
This is where things get a little more complicated. When you close a credit card account it may affect your “credit utilization”. Credit utilization is how much credit you have (or the limits on your cards) compared to the amount of credit used (your balances). Closing one of your cards lowers the amount of available credit and if you carry balances on other cards it will then hurt your utilization percentage, thus lowering your credit score. At Quizzle, we recommend keeping your utilization around 30 percent.
8. Pulling or Looking at Your Credit Report Will Lower Your Credit Score
There are two different kinds of credit inquires – soft and hard. When you pull your credit report for your own purposes, it’s categorized as a “soft inquiry” and does not affect your credit score. On the other hand, when a creditor or lender pulls your credit report to approve you for a loan, it is categorized as a “hard inquiry” and has a small, but negative impact on your credit score. This shouldn’t discourage your from borrowing money, but it is something to consider next time the cashier at Kohls asks you if you want a Kohls card. (Learn more about credit inquiries.)
9. Missed Payments on Bills or Debt Not Generally Reported to Credit Bureaus Doesn’t Affect Your Credit Score
First, any time you pay a bill late, or don’t pay for that matter, it can be reported to the credit bureaus. There is no standard policy for all companies as to when, if, or even how often they report late payment or negative information. Despite the inconsistency, just because you’ve never seen a particular bill listed on your credit report it can still hurt your credit score if you don’t pay it on time.
10. Disputing Accurate Info on Your Credit Report Will Remove It
Errors and inaccuracies are the only information on your credit report that you can dispute. Once you’ve filed a dispute the credit bureau, by law, has 30 days to investigate that error. If they find your dispute to be valid, they will remove the inaccurate information. If, however, the dispute claim is found to false, the information in question on your credit report shall remain intact. Don’t believe the credit repair hucksters that tell you they can remove correct, but negative information from your credit report – it’s illegal and a scam.
[Free Resource: Check your free credit report and score]
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