Eight Credit Score Myths

The following eight credit score myths are video segments of a conversation I had with my friend, Blair Warner, a Credit Counselor with Upgrade My Credit. The credit score is a very important component of the overall creditworthiness of a buyer, and demands attention.

Eight Credit Score Myths

A lot of these are called myths because every myth has a little truth in it, if you’ve ever thought about it. So, there is some truth in each of these statements, but that depends on the person’s goals.

The Fair Isaac Corporation developed the FICO score, which is a widely used credit scoring model in the United States. It ranges from 300 to 850 and is utilized by lenders to evaluate a person’s creditworthiness. The score is determined by considering factors like payment history, credit utilization, length of credit history, types of credit used, and new credit applications.

FICO uses the three major credit bureaus, Equifax, Experian, and TransUnion, to gather information and calculate credit scores. These credit bureaus collect data on individuals’ credit history, including payment history, credit utilization, length of credit history, types of credit used, and new credit applications. FICO then analyzes this data from the credit bureaus to generate credit scores for individuals.

The information from all three credit bureaus is taken into account to ensure a comprehensive assessment of an individual’s creditworthiness. A higher FICO score indicates a lower credit risk, making it more convenient for individuals to qualify for loans and secure favorable interest rates.

Myth: “I always pay with cash, my credit should be fine.”

There is a lot of teaching out there that tells everybody to just pay cash for everything. And it would be nice, to be honest with you, if we were able in our society, to do that, and pay cash. But, that’s not the way our society is built right now. Responsible use of credit is essential for building a credit score, especially for buying a house.

It sounds like a catch-22, but you have to borrow and use credit to establish credit. Doing so wisely is the key. Gradually using credit and paying it off is the best way to establish and build a good credit score. You can’t buy a house without any credit history. You can’t make any major purchases, like an automobile, without good credit. Besides buying major purchases on credit, there are several surprising benefits to having good credit.

Myth: Keeping a Low Credit Limit:  Good or Bad Idea?

There’s a difference between debt management and building your credit score and building your credit profile. If you have a problem spending on credit cards and over-spending and you need some sort of self-imposed control over using credit cards, then yes, it would be ok to lower your limits so you’ve put that self-imposed control on your spending habits. But that’s not going to help you build your credit as well as if you have higher limits and then you just use a smaller portion of those higher limits.

If you are the type of person that has self-control, it would be better to have a $5000 credit card and never go over a thousand or two on your spending, then to have a $2000 credit limit card, because you’re trying to curtail your spending, but yet you always max it out to 2,000.

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Myth: “I’ve always gotten credit when I asked, my credit score should be fine”

Just because you’ve always been able to get credit doesn’t mean your credit score is good. It’s important to monitor your credit regularly to catch errors or late payments. Your score is not going to always be high because you used to get credit in the past. You have to stay on top if it.

Also, consider that some credit is easier to get than other types of credit. High interest rate credit cards are easier to get than low interest credit cards. Auto loans are easier to get than credit cards. You might think you have a good score but, really, to get an auto loan all you have to have is about 620, and that is not considered a great score, but a fair score.

If you think about it, a car is a lot easier to repossess than a house, hence the differing standards.

 

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Myth: “Closing out some credit cards will help my credit score.”

This is probably the most common of the eight credit score myths. A lot of people start cutting up their credit cards after listening to seminars and speakers. That is not a good idea. It is important to understand how FICO measures your credit score. One of the scoring categories that FICO uses is the length of your credit history. Closing old credit accounts, especially those with longer histories, can harm your credit score. It’s advisable to keep a few lines of credit open.

Maintaining 2 to 5 lines of credit is advisable for a healthy credit profile. If you think you have too many cards, there is a strategic way to go about eliminating accounts. You want to get rid of the newest ones first, but not all at once.

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Myth: “Consolidating my credit will help raise my score.”

Consolidating loans may help with debt management but may or may not boost your credit score. When you consolidate several cards into one loan, you close out the old ones. Again, this shortens your credit history, which can lower your score.

Using a consolidation loan really depends on your goals. If you aren’t going to buy a house for another few years, then it makes sense if you need to manage your debt. You will have a few years to build your credit score back.

On the other hand, if you want to buy a home within 12 months, it isn’t the best strategy.

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Myth: “Credit Inquiries will hurt my credit score.”

If you pull your own credit, it’s a consumer pull. Sometimes called a soft pull. That doesn’t affect your credit. It’s only when a lender pulls your credit, like at a car dealership, that it is it counted as an inquiry.

Credit inquiries are not a one-to-one impact on your credit score; they consider the frequency and context of inquiries. FICO looks at how many times your credit has been pulled in a twelve-month period. And particularly if one weekend you went car shopping and your credit was pulled 10 times.

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Myth: “It will take years to increase my credit score”

The time it takes to repair a credit score depends on your starting place, as well as what is on your credit report. Some negatives are easier to clean up than others. Also, if you’re starting at 400, it will take longer to raise your score than if you’re starting at 500.

Generally, it can take as little as six months, or as long as a year or two.

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Myth: Late Payments, How They Affect Your Credit Score

One of the eight credit score myths that are damaging… Late payments definitely affect your score. FICO looks at the last 24 months with more emphasis. They look further back, but the focus is on the recent two years. If your history is sprinkled with late payments, it signals to FICO that you are a risk.

If you have just one late payment, there is something you can do. You can write a good-will letter and send it to the three credit bureaus. You can explain the circumstances and ask them not to count the late payment.

 

To watch the original video, a 34 minute video, Eight Credit Score Myths: Credit Score Myths

The responsible use of debt is the theme of the discussion about credit. Lenders need to know that a buyer is creditworthy and has used credit in a responsible manner. When you’re starting from zero, it will take about 2 or 3 years to build the kind of credit score that will allow you to get a loan and get it with a good rate.

For more questions, visit Blair Warner’s website, Upgrade My Credit. For professional services, a credit specialist can really make a difference.

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