Credit Score is an assessment used to evaluate the amount of "risk" involved in a credit transaction, established from the analysis of information provided in a consumer’s application, the potential loan, and the consumer’s credit report. So your credit score is used in instances when you try to get a loan, want to rent an apartment, apply for a job, sign up for a credit card and even when you start a new cell phone plan. This calculated number affects us in many more ways than we realize, yet very few of us understand how credit scores are calculated and have very misunderstood views of their credit score. Here are five things that most people get wrong about their credit scores.
“If I have a lot of money, I’ll have a good credit score.” - FALSE - Your credit score is not based on any wealth that you have what-so-ever. It’s completely based on your existing and past credit. 35% of your credit score is based on your past payment history, 30% is based on your existing debt, 15% is based on your length of credit history, 10% is based on new credit that you apply for and another 10% is based on the types of credit that you use. Hypothetically you could be a multi-millionaire and not have enough data to calculate a credit score if you never borrow money.
“If I check my credit report, my score will go down.” - FALSE - You can personally check your credit report as many times as you would like without having it effect affect you score. The one and only site to get a free credit report is AnnualCreditReport.com, if you want to find out your credit score, you’ll need to head on over to MyFico.com, all of the other sites wishing to provide you a free credit report will end up costing you money in the long run.
“I should pay off my credit cards and close them to increase my credit score.” HALF TRUE HALF FALSE - Paying down your credit cards is an excellent idea to improve your credit score, but after the balance is paid off, do not under any means close the account. By closing the account you are essentially increasing the percentage of debt that you are using of all the debt that you have available to you, which will negatively affect your score.
“You only have one credit score.” FALSE - You actually have three different credit scores from Transunion, Equifax, and Experian. Each of these companies might also have different types of scores for you. The one most commonly used by the financial industry is the FICO score; if you purchase your credit score, make sure that you are getting a FICO score rather than some other calculated number.
“If I shop around for loans, my credit score will be damaged.” HALF TRUE HALF FALSE - It’s true that if you apply for a lot of new loans, credit cards and other accounts that your credit score will go down, but if you apply for the same type of loan at different banks and financial institution within 14 days of each other, it will only count as one application so your credit score will be very minimally affected.
“My spouse’s credit score will affect mine.” FALSE - People tend to think that when they get married that there credit scores become one, but this is not the case. You still have individual credit scores, and whenever you both sign for something, say your home loan, it will appear on both of your reports. If only one of you signs for something, it will sign up on only the person who signed for it’s report and not their spouse. |
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