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The FICO credit scoring model is misunderstood by many consumers. There are some popular misconceptions about what actions can boost or damage your score, what's factored into your score, and how your credit score affects your ability to buy a home or car.
With that in mind, here are 10 of the most common credit score myths, and the reality behind each one.
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1. It's impossible to get a credit card if you don't have any credit
In order for you to have a FICO credit score at all, your credit report must have at least one account opened for six months or more and at least one account that has been reported to a credit bureau within the past six months. If you don't meet both of these requirements, then you don't have a FICO score, and it can certainly be difficult to obtain credit.
However, it's not impossible. You can apply for a credit card or loan with a cosigner, become an authorized user on someone else's account, or get a secured credit card on your own. Any of these methods can help you start building a credit score.
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2. Checking your own credit will hurt your score
There are two types of credit checks, or inquiries. A hard inquiry occurs when you're applying for credit and a lender pulls your credit file as part of their decision-making process. Hard inquiries are factored into your credit score, and too many of them can certainly lower your FICO score.
On the other hand, a "soft" inquiry includes any credit check you didn't initiate as part of a credit application, such as when a company pre-screens you for a promotional credit offer. Soft inquiries are not considered when computing your credit score.
Checking your own credit is a form of soft inquiry, and even if you check your credit report every day, it won't affect your score at all.
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3. A higher income will boost your credit score
Many people think a higher income will raise their credit score, but your income does not affect your credit whatsoever. A consumer who earns $30,000 per year has the same ability to earn an excellent credit score as someone who earns $300,000.
While we're on the topic of what is not included in your credit score, it's important to realize that age is not a factor either, nor is your race, religion, receipt of government assistance, or other non-debt-related factors.
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4. Lenders only use one credit score
It's true that the vast majority of lenders use the FICO credit scoring model, but that doesn't mean there's a single credit score that can be associated with your name.
For starters, you have FICO scores generated by all three of the major credit bureaus: Equifax, Experian, and TransUnion. Additionally, the FICO formula has been updated several times. FICO Score 9 is the latest version, but many lenders are still using FICO Score 8. As if that weren't enough, there are industry-specific credit scores as well, such as auto- and credit card-targeted FICO scores. In all, there are 28 different FICO scores lenders could potentially see when you apply for credit.
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5. Not using credit cards at all can help your credit score
Despite the popular misconception, avoiding credit cards altogether isn't likely to boost your credit score. Sure, if you have a mortgage and an auto loan, and you maintain fantastic payment histories, then it's certainly possible to build a strong credit score without credit cards.
However, avoiding credit cards can hurt your score in a couple of ways. First, 10% of your score comes from your "credit mix," which is boosted by having several different types of credit accounts. Also, 30% of your score comes from "amounts owed," which includes your credit utilization ratio, or the percentage of your available credit you're using. If you don't have any open revolving credit lines, then this category can't raise your score.
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6. Married couples have just one credit score
It's a common misconception that married couples are essentially treated as one person for credit scoring and other financial purposes. Depending on your situation, this could be an advantage or disadvantage.
For example, if one spouse has bad credit, but the other has an excellent credit history, the spouse with excellent credit can apply for credit cards and loans on their own – the bad credit of the other spouse doesn't need to be a factor. On the other hand, for purchases that require both spouses' income to qualify, like a mortgage, the credit of both individual spouses will be considered unless one spouse could afford the house on their own.
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7. Closing an unused credit card will boost my score
It may seem like getting rid of an extra, unused credit card would be a good thing in the eyes of the credit bureaus. After all, it reduces your ability to borrow money, which should make you less of a risk factor, right?
Not exactly, because again, your credit utilization is a big factor in your credit score. Closing an unused credit card effectively lowers your total available credit, and therefore it can increase your credit utilization ratio if you have outstanding debt on other credit cards.
In addition, the age of your credit accounts plays a big role in the FICO formula, so if the account you close is one of your older accounts, it could hurt your credit score in this respect as well.
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8. I can't buy a home or get a car unless I have great credit
This simply isn't true. You can get a conventional mortgage with a credit score as low as 620, or an FHA mortgage with a score in the 500s. Similarly, subprime auto lending is a large part of the market.
However, while you can buy a house or car with a relatively low credit score, you can to pay expect a higher interest rate and/or additional fees, which can cost you lots of extra money over the term of the loan.
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9. Credit scores don't change often
Many people believe that credit scores are updated at set intervals, such as once a month. In fact, credit scores can update on a daily basis, if new information is added to your credit report. A quick glance at my credit monitoring service shows that my TransUnion FICO score has changed five times in the past month alone, generally due to a change in one of my loan or credit card balances.
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10. It's impossible to have a perfect credit score
The FICO credit scoring model has scores ranging from 300 to 850, with an 850 representing a "perfect" credit score. And while a perfect credit score is extremely rare -- less than 1% of consumers have one -- it's certainly not unattainable. In fact, my colleague Sean Williams is a member of the perfect credit club. Furthermore, you might be surprised to learn that there's no magic formula to achieve perfect credit; you just need to know how the FICO scoring system works and use common-sense good credit behaviors.
