7 Things You Think You Know About Credit Scores, But Don’t
By William LoCasto
When was the last time you checked you credit report? If you’re like many people, it’s probably not frequently enough. The good news is you can do it at least three times a year at no cost, because the three major credit reporting agencies are required to provide one free credit report a year. In addition, your bank may offer additional services for checking you credit.
You credit scores and report will be a factor for so many decisions you make in life. With many major financial commitments, you credit report is likely to be checked. When you’re buying a home, your mortgage lender will look closely at your credit report. The same goes for car loans. Credit card companies check to determine not only whether they are willing to offer you credit, but also your card limit and interest rate. Utility and phone companies may also want to check to determine how likely you are to pay your bills, or whether they should require a prepaid plan. Even prospective employers often check credit reports.
The bottom line is that your credit report will play a role in most major events in your life. This means it’s in your best interest to check you scores regularly for any anomalies, and so you know if you need to take steps to improve your score. Checking your score is a great start, but only if you know how they actually work, which isn’t always easy. For one thing, about a year ago, FICO (the most widely used credit scoring resource used by lenders), updated its scoring system, which could impact your score.
Aside from that, there are a number of common misconceptions about credit scores that could prevent you from improving your credit ratings.
Checking your credit report impacts your score
This is not true. You can check your own credit score as often as you want without any impact. However, if you are applying for credit from multiple sources, such as a car dealer, a mortgage lender, and a retail store, those credit checks could slightly dip you score.
Accessing lines of credit doesn’t impact your score
Again, this is not true. The amount of credit you have used, compared to your available credit, is one of the biggest factors in your credit score. A lower utilization rate is better for your overall credit.
Income changes your credit score
Yet again, this isn’t true. Your job and income history has no impact on your credit score. It is, however, used by lenders to determine how much they are willing to lend you.
Closing credit cards can improve your score
This is also not true. In fact, if you close a credit card at the wrong time, you might actually lower your score because you’re reducing your available credit, which will increase the percentage of credit you’ve used. That’s not to say you should never close credit accounts – there are often very good reasons to do so, but be aware it could impact your score.
Marriage changes your credit score
You guessed it, not true. Credit scores aren’t like taxes; they aren’t combined into households. Your credit score is yours alone. Lenders, though, may ask for information about your spouse to determine your loan amount and interest rate.
You need to have a perfect score
Also false. While it’s possible to have a perfect credit score, there’s isn’t a benefit. Once you have reached high credit worthiness, making it perfect won’t create any noticeable benefits, other than knowing you have a perfect score. That’s not to say you shouldn’t strive for perfection, but you also shouldn’t worry about not reaching it with your credit score – it won’t hurt you.
Poor credit is forever
This may be the best misconception of all. Unless you have perfect credit, you can always improve your score over time. The key is to not only understand what goes into your credit score, but to start following smart financial habits, including creating and sticking to budgets, paying off existing debt, and cutting out unnecessary spending.
There are many other questions that don’t have simple yes or no answers when it comes to credit scores. For up-to-date information on what impacts your credit score and what doesn’t, or for advice on how you can start rebuilding your credit, talk to your bank’s experts. Remember, you credit score will impact you for your entire life, but just because you don’t have a high score today doesn’t mean you can’t improve it.