Some baseless rumors are perfectly harmless. Believing Elvis sightings or trying to duplicate the famed (but failed) Pop Rocks candy-and-soda explosion won't cause irreparable damage. But when falsehoods about credit scores go unchecked, your financial well-being is on the line.
Don't wreck your credit by following advice based on baseless rumors. Let's slam the brakes on the credit score rumor mill and lay these seven myths to rest.
1. Closing an account removes all evidence of its existence from your record. (See also: Cutting up a credit card closes the account.)
Wouldn't it be nice if we could erase our past credit misdemeanors so easily? It would. But you can't.
The credit reporting industry has a long and somewhat unforgiving memory. Like that high school prom picture your mom still insists on displaying on the mantel, it might seem you can't escape your past. So if you close an account in hopes of hiding the fact that you missed payments or defaulted on a loan, understand that the information will remain on your record, in most cases for at least seven years.
2. Your credit score is your FICO score and your FICO score is your credit score.
This is one of those Kleenex/Xerox things in which a brand name becomes so ubiquitous for a product that people use it to refer to all products of the same type -- from tissues to copy machines to credit scores -- regardless of who makes it.
So let's set the record straight: There are two main companies that provide credit scores:
- FICO, from Fair Isaac Corp., has become the "Kleenex" of credit scoring for good reason. It is used in more than 90% of all lending decisions.
- VantageScore is the credit rating product that the three major credit bureaus (Equifax, Experian, and TransUnion) created via a joint venture to compete with FICO, although it is still a distant second in overall adoption.
To add a bit more complexity to the issue, you might not know there are multiple versions of your FICO and VantageScore scores. These same companies that generate your credit score also generate customized scores for insurance companies, credit card companies, landlords, and other businesses that have a proven need to know your score. Those are based on a customized version of the credit scoring formula.
What matters most to you is that, directionally, the consumer version of your FICO or VantageScore credit score will tell you where you stand in the eyes of lenders and others.
3. Age and income are factored into your credit score.
Nope. Nor are race, religion, or marital status. But while we're on the subject of your schmoopy...
4. When you and your soulmate/significant other merge your financial lives, out pops a joint credit score.
Credit records are based on Social Security numbers. And while your name, tax filing status, address, and Netflix queue might change when you tie the knot, your Social Security number is yours and yours alone for as long as you (and just you) shall live.
When you apply for a loan together (for a mortgage or a credit card), each of your credit scores will be used to determine the terms of the loan and the status of the account will be reported on both of your credit reports. And, no, the lender doesn't care who forgot to put the check in the mail. If the payment is reported late, it will be noted in each of your credit files and factor into each of your individual scores.
5. Checking your score will hurt your score.
Go ahead, check away! You can check your own credit score -- what's called a "soft credit inquiry" in credit circles -- as many times as you want without raising eyebrows. It's when other people start checking your score that a "hard credit inquiry" is generated. Too many of those, and your score can drop.
This happened to Nicki Minaj last November. Her score dropped about 100 points after a media outlet published a leaked police booking photo from 2003 without redacting her Social Security number; ne'er-do-wells then kept checking her credit report (and, I assume, applied for credit in her name).
To minimize the damage that outside inquiries inflict on your score when you're shopping for a loan for a home or car, limit your comparison shopping to a tight time frame. Try to cluster the lender inquiries within a week or two, which the scoring formula will recognize as a singular event and not a run on the system.
6. Keeping a balance on your credit card is good for your credit score.
Wrong! You do not have to carry revolving debt to help your credit score. However, you do have to use your cards at least occasionally to give your lenders something to report to the credit bureaus. If your cards gather dust for too long the account can go dormant in as little as three months. In this case, no news is, well, no news. Without any activity, the lender might eventually stop reporting the line of credit to the bureaus altogether, which can lower your credit score if you don't have many other active current accounts.
So use your cards, even if it's just to pay for bubble gum at the gas station. Then pay off those balances ASAP.
7. Actively doing stuff to improve your credit score will help boost it.
People often do more harm than good when they start doing things they think will improve their score -- moves like closing old accounts (which affects your credit history and lowers your available credit), applying for new lines of credit (which can ding your score if you try to get new cards willy-nilly), or transferring balances (which can push you closer to the credit limit on a low-limit card).
If you have a good credit score already (one that is 760 or higher), the biggest mistake you can make is to fiddle with stuff in an attempt to make it even better. Those extra 10 or 20 or even 50 points are not going get you better loan terms. But trying to go for the gold might cost you 10 points that can make all the difference in the world.
So if your credit score is already good to excellent, keep doing what you're doing -- pay your bills on time, use credit responsibly -- and your credit score will age like a fine wine and improve gradually over time.
If your score isn't exactly brag-worthy, there are no quick fixes (and don't pay anyone who says there are) except for maybe one. The one thing you can and should do right away is to check your credit report for errors. (Pull your free credit reports from annualcreditreport.com.) If there are errors or inaccuracies, work to get those removed from your files and your score will improve very quickly.
After that, time really does heal all wounds, and this is particularly true when it comes to credit scores. Once you've reformed and become a model borrower, your recent credit-related behavior will start to outweigh your past youthful indiscretions until eventually you and any lenders you're courting can have a good laugh about "that time back in the day." In the meantime, here are nine legitimate ways to improve your credit score and get on the path of stellar credit.
