Can you get a credit card with a bad credit score? And how many different FICO credit scores do you have? If you said "no" or "three," respectively, to these questions, you've fallen victim to a common credit score myth. Here's the truth behind these two credit score myths, as well as some other common misconceptions.
Myth 1: Closing an old credit card will raise my credit score
This is the exact opposite of what generally happens. Closing an old or unused credit card can hurt your credit in two main ways.
First, 15% of your FICO credit score is based on the length of your credit history, which includes the average age of your credit lines. Closing an older account could potentially bring down this average, which could cause your score to drop.
Second, 30% of your FICO score comes from a category called "amounts owed." This doesn't necessarily mean the actual dollar amounts of your debt, but rather the amounts you owe relative to your available credit. Closing an unused card lowers your overall available credit, which, if you carry any credit card balances, will increase your credit utilization as a percentage of the total.
To be clear, there are some smart reasons to close credit cards. For example, if the card has a high annual fee and you don't really care about the perks of the card, it may be worth a temporary hit to your credit score to get rid of it. Just be prepared for your score to go down a bit when you do.
Myth 2: If my credit is bad, I can't get a credit card
It's true that if your credit is bad, you're not going to qualify for the best credit card offers or the lowest interest rates. However, that doesn't mean you need to be stuck using debit cards and cash.
Secured credit cards are available to borrowers with little, no, or bad credit, and work just like a standard credit card with one big difference: Before you can receive the card, you'll need to put down a deposit equal to your credit line to "secure" the card.
Secured cards are accepted just like regular cards, and perhaps more importantly, report to the major credit bureaus just like a standard credit card. And because your security deposit reduces the issuer's risk, secured cards typically have competitive fees and interest rates. To sum it up, if you have bad credit, a secured card can be a valuable financial tool and can help you improve your credit as you establish a record of good credit behavior.
Myth 3: All credit checks are bad for your score
Some credit checks are bad for your credit score. Specifically, your credit score only considers "hard inquiries," which generally only occur when you initiate a credit application.
On the other hand, soft inquiries will have no effect on your score whatsoever. Common types of soft inquiries include promotional inquiries (pre-approved credit offers) and certain types of loan quotes that specifically tell you they won't affect your credit. For example, marketplace lenders such as Lending Club allow prospective borrowers to check their rates without affecting their scores.
In addition, checking your own credit score won't hurt your score, either. You can literally check your credit score every day, with no adverse effect.
The FICO scoring formula only considers hard credit inquiries from the past 12 months. To be clear, a single inquiry is unlikely to drop your score by more than a few points.
Myth 4: I only have one FICO credit score
This myth has gotten more common since many major credit card issuers have started to include borrowers' FICO scores on their account statements. It may surprise you to learn just how many FICO scores lenders could possibly check. For starters, you have a different credit report, and therefore a different score from each of the three major credit bureaus -- Experian, Equifax, and TransUnion.
In addition, there are several different FICO-score versions generated by each credit bureau. The FICO scoring model has been updated several times. FICO Score 9 is the latest version, but FICO Score 8 is still widely used by many lenders. In addition, each bureau has a few different scores specific to auto lending, credit card issuers, and mortgage lending. In all, between the three bureaus and including all of the different versions, there are 28 different FICO scores that are in use.
There are subscription-based sites, such as myFICO.com, which will show you all of your FICO scores (for a fee). It may be worth the cost, especially if you're planning to apply for a specific type of credit soon, such as a mortgage.
Myth 5: If my income increases, so will my credit score
It's a common misconception that higher-earning individuals have an advantage when it comes to credit scoring. In fact, your income plays absolutely no role in your FICO score. In other words, an entrepreneur earning $1 million per year has the same ability to get an excellent credit score as a teacher earning $40,000.
In addition, other factors that many people think are included in your credit score, but are not, include marital status, age, and being a recipient of government assistance.
The Foolish bottom line
The more you understand about your credit, the better equipped you'll be to make smart decisions that can save you money, make applying for credit easier, and boost your credit score.