Your parents and acquaintances likely have a lot of advice on how to get and maintain a good credit score. Some of this advice is correct, but some of it is a myth.
In her 2019 article, “9 Myths About Credit Scores,” Demetria Gallegos presents a comprehensive overview of the do’s and don’ts of credit scores. Gallegos points out that with the near universal use of credit scores today by banks, landlords, employers, rental agencies, and others, your credit score represents more than the financial aspects of your life. Your credit score can be the key to a better standard of living. Gallegos debunks the common myths around credit scores; I have listed these below and included my commentary (Galegos (2019).
Myth: Checking My Credit Score Hurts My Credit Score.
There is a difference between a hard inquiry and a soft inquiry. A hard inquiry is when a bank checks your credit in order to evaluate whether they will extend a loan to you. A soft inquiry is an employer checking your credit as part of a background check on you or a utility company checking your FICO score to set up a new account. Each hard inquiry will drop your FICO score by a few points. Almost all soft inquiries will not. If you are simply checking on your credit score, there will be no loss of points. You can check your credit score for free on a number of websites, like Discover Credit Score, Credit Karma, or Mint.
Discover Credit Score is best in terms of data sharing and solicitation. If you just want to check your credit score, they do not share your info with any other credit card company or commercial enterprise. Credit Karma has the most comprehensive information available, providing a look at all of your outstanding credit and information reported to two of the three credit agencies. It also allows you to dispute a late report or other inaccurate information directly from their website. However, they do sell your info to credit card companies, and you will likely receive credit card solicitations. Mint is owned by the accounting and financial software company, Intuit, and is primarily a free personal budgeting site. You will need to sign up for the personal budget offering before you can enter the site.
Myth: If I Pay My Bills on Time, That is All I Need to Worry About.
All you have to do is look at the credit score components above to realize that paying your bills is not enough on its own. Pay attention to how much credit you have available and how much of your total credit is outstanding. As a rule of thumb, you should only have about 30% of your total credit limit outstanding. Try spreading your purchases among two or more credit cards. Call your credit card companies and ask for your credit limits to be increased. If you have good credit, the credit card companies will oblige you 80% or more of the time. This will immediately reduce the percentage of your outstanding credit.
Myth: Carrying a Balance on My Credit Card Helps Boost My Credit Score.
Carrying a balance will not help your credit score. In fact, if the balance is above 30%, it will hurt your credit score.) In addition, carrying a balance if you can afford to pay it off just costs you interest payments.
Myth: Closing an Old Credit Card with a High-Interest Rate Will Help My Score.
Since the amount of outstanding credit in part determines your credit score, it is best to pay off high-interest credit cards and leave them open. Do not cancel them unless they charge you an annual fee. If there is a fee involved, call the credit card company and ask them to substitute a card without a fee and ask to have the same credit card number.
Remember, the length of the credit extended helps your score. FICO ignores the closed account status and continues averaging the age of the closed account with your open accounts. Vantage, however, removes closed accounts (and your payment record) from its calculation, so you lose the value of positive payment on a past account. The best policy is to keep high-interest credit cards open and use lower-interest credit cards for purchases.
Myth: Opening a New Retail Credit Card Is Good for My Credit Score.
Retailers entice you with 0% interest and other incentives to open new credit cards. When you do, the average age of your credit gets younger, and you lose a few points from the inquiry. In addition, the interest rate from the retailer after the initial period is generally higher than the average interest rate on your other credit cards.
Myth: It Hurts My Credit Score to Comparison Shop for a Mortgage, Auto, or Student Loan.
The credit rating models take comparison shopping into account. If the credit rating agencies see multiple hard inquiries around the same time, they will assume you are shopping around. However, there is a time limit on this. VantageScore bundles similar inquiries within 14 days into one hard inquiry. FICO has shopping periods of 14 to 45 days, depending on the type of credit. In any event, a good tip if you are buying a house is to wait till after closing to take on any new credit for furniture or appliances. This will ensure the highest credit score as you go into closing.
Myth: The Older My Unpaid Debt, The More It Hurts Me.
Late payments, collections, foreclosures, and Chapter 13 bankruptcies remain on your credit report and hurt your credit score for seven years. However, the older the credit problem, the less it affects your credit. So if you have an unfortunate event like bankruptcy or foreclosure, stay current with any new or existing credit you are not delinquent on. As to collections, credit card companies aggressively pursue delinquent accounts for about two years. After that, they often sell the delinquent debt to collection agencies and take the debt off their books. If a legitimate collection company contacts you, you should try to make a deal to pay only part of the debt. Collection companies usually buy delinquent debt for 20% of its full value, so anything they collect over that is profit. The Consumer Financial Protection Bureau (CFPB) has established rights for you when dealing with collection companies. They cannot threaten or harass you. If they do, contact the CFPB.
If you have gone through a bad financial period, a good way to re-establish credit is to get a secured credit card. With this type of card, you deposit money into your financial institution and spend up to that preset limit. If you pay off the charges each month, your credit score will improve, and in about a year (maybe less), you can likely get a regular credit card again.
Myth: Selecting “Credit” While Using Your Debit Card for a Purchase Is Good for My Credit Score.
There is no effect at all on your credit score if you select “credit” when using a debit card. However, you should be sure that your financial institution does not charge any fees for debit transactions.
Myth: Credit Reports Are Accurate.
Credit reporting firms make mistakes. An incorrect score could come from something as simple as someone who shares your name being put on your report; it could also be the result of a criminal stealing your identity and taking out credit cards in your name. Experts advise each of us to check our credit reports every four months. The most effective way to do this is to take advantage of the free credit reports to which every consumer is entitled. You are entitled to one free credit report each year from each of the three credit-reporting companies (Trans-Union, Experian, and Equifax).
Order a credit report every four months but order the report from a different one of the three credit-reporting companies each time. That will give you three free reports each year spaced out every four months. You can also monitor your credit through Credit Karma. It is free and alerts you if there is a significant change in your credit score or if there is a hard inquiry.