Debunking Credit Score Myths Provided by Laurissa Grubb from Blue Eagle Credit Union
C redit scores are an area of personal finance that seem a lot more mysterious than they actually are. Many people believe that improving them is a matter of trial and error, and as a result there’s a lot of “credit score advice” floating around that can end up doing more harm than good. Four common credit score myths have been rounded up and debunked below.
MYTH #1: You have no control There are a lot of factors that make this myth easy to buy into—credit bureaus keep their exact credit score formulas a secret, you can’t access your credit report whenever you’d like (not for free, anyway), and it’s possible to be financially stable and still have a miserable score. It’s okay to find credit scores confusing, but if you have an accompanying “there’s nothing I can do about it” mentality, ditch it right now! Your credit score is a reflection of your borrowing and repayment behaviours, and that means you have a lot more control over it than you think.
MYTH #2: There’s a “quick fix” Though junk mail and late night commercials try and convince you otherwise, boosting your credit score doesn’t happen overnight. The good news is that the things you can do to positively influence your score are simple and don’t require a lot of time (or even that much effort!)—but the tradeoff is that you’ll have to be patient while waiting for your new good credit habits to take effect. Your credit score is more of a track record than a snapshot, so consistency is key. MYTH #3: Checking my credit report negatively affects my score This myth comes from confusing two different types of credit score inquiries: hard inquiries and soft inquiries. Hard inquiries are made by lenders or credit card companies when you apply for a new line of credit (a loan, a new credit card or a mortgage, for example). Soft inquiries are made by you or by others for background check purposes (a potential employer or landlord, for example). Because hard inquiries suggest you might be taking on more
credit soon, they usually lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score in any way. This means you have nothing to lose by accessing your own score—in fact, doing so will help you understand what your current credit activity looks like and how you can improve it. Sidenote: there are some situations (like renting a car or a landlord running a credit check) where either a hard inquiry or a soft inquiry can be made. In these cases, it’s a good idea to find out beforehand what kind of inquiry will be made so that you know what to expect. MYTH #4: Opening or closing a bunch of credit cards will improve my score Even though these myths are the complete opposites of each other, they’re still widespread—and very misleading. This is because opening and closing credit cards affect several different aspects of your credit score.
How is your credit score calculated? PAYMENT HISTORY Making payments on time boosts your score CAPACITY The less you use of your total available credit each month, the better LENGTH OF CREDIT A longer history of good credit habits raises your score NEW CREDIT Opening lots of new credit cards in a short amount of time can hurt this part of your score MIX OF CREDIT A mix of revolving credit (credit cards) and installment loans (mortgages; car loans) boosts your score
Growing Up In the Valley • April 2015