4 Things Everyone Gets Wrong About Credit Scores

Your credit scores have a lot of power over your life. They're a big factor in whether you can finance a major purchase or get approved for the best credit cards. While we know the factors that determine your credit scores, no one knows exactly how they're calculated.

All that mystery results in lots of credit score confusion. Here, we'll dispel four common myths about credit scores.

1. Myth: Prospective employers can see your credit score

Fact: Potential employers see a modified version of your credit report, not an actual score.

The Professional Background Screening Association (PBSA)'s 2021 "Background Screening: Trends in the U.S. and Abroad Survey" found that 51% of employers with U.S. locations do credit or financial checks on candidates. But those employers aren't really seeing anyone's credit scores.

When a company does a credit check as part of its hiring process, it will see a modified version of your credit report, but won't actually see your credit score. Unfortunately, though, the company will see issues like missed payments, bankruptcies, and high outstanding balances that result in having a bad credit score.

If you know your credit score contains less-than-flattering info, it's often helpful to be upfront with your recruiter. Sometimes they'll be understanding if you can explain any negative history, particularly if the job doesn't involve handling money or working with sensitive information.

2. Myth: Being denied for credit hurts your score

Fact: Hard inquiries ding your score a bit, but your credit reports don't show whether you were denied for credit.

When you apply for credit, you typically get a hard inquiry on your credit report. That can tank your score by a few points in the short term. But your credit report won't show whether you were approved or denied. The act of applying for new credit is what causes the temporary drop.

There's an important caveat, though: Over time, applying and getting approved for new credit will help your score. A new credit card that you don't charge up could lower your credit utilization ratio, while a new loan could diversify your credit mix. If you're frequently denied for new credit, you'll consistently knock points off your credit without getting the occasional boost.

3. Myth: Carrying a small credit card balance helps your score

Fact: While having regular activity is important, carrying a balance doesn't benefit you.

You need to use your credit card regularly to build a good payment history and keep the account active. But some people will tell you that carrying a small balance is good for your score -- which is blatantly false. Though it isn't the end of the world if you carry a small balance (especially if you're taking advantage of a 0% APR offer), doing so won't help your credit score.

Always pay off your balance in full at the end of the billing cycle if you can afford to. Otherwise, aim to keep your credit utilization ratio, which is the percentage of available revolving credit you're using, below 30%.

4. Myth: You only have three credit scores.

Fact: You have many different industry-specific scores.

You may think you only have three credit scores -- one for each of the three major credit bureaus. While credit scores are based on the information from the three bureaus, there are actually many different scoring models lenders can use.

In fact, Experian reports that FICO has more than 40 scoring models, while VantageScore has four. Many lenders use industry-specific models, which is why you may see a different credit score when you're applying for a car loan versus if you're seeking a credit card.

The truth about credit scores

We'll never be privy to all the math that goes into calculating our credit scores. But here are a few things we do know that will help you build and maintain a healthy score.

• Payment history is the most important credit score factor, determining 35% of your FICO® Score.
• Credit utilization is a close second, accounting for 30% of your score.
• You'll typically need open credit, i.e., an active credit card or loan, to build your credit history. Monthly bills, like rent and utilities, usually aren't reported to the credit bureaus.

If you can't get approved for credit because you have bad credit or no credit, you still have options. The best way to start building credit is to apply for a secured credit card, where you put down a deposit that serves as your line of credit. As you make on-time payments, your score should improve, and you should eventually qualify for an unsecured credit card.