Chapter 4: Credit Score Myths
13 myths about credit scores
There’s a lot of misinformation out there about what impacts your credit score, what doesn’t, and how to improve a poor score. Here are 13 common credit score myths and why you should be wary of them:
- Checking your credit will hurt your score. When you check your own credit score, that’s considered a “soft” inquiry, similar to when a lender checks your score to prequalify you for an offer or when your landlord checks your score before approving you for a lease. Soft inquiries do not impact your credit score.
- When you marry, you and your spouse’s scores will merge. Nope. Every person has their own credit score tied to their social security number. If you and your spouse hold joint credit card accounts or are co-borrowers on a mortgage loan, those credit accounts will appear on both of your credit reports and impact your score. But there’s no such thing as a merging of credit scores with marriage.
- If you have money in the bank, your credit score will be good. For better or worse, how much money you have in the bank won’t affect your credit score. Whether you have $5,000 to your name or liquid assets in the hundreds of thousands doesn’t matter. Your credit score reflects your payment history, credit utilization, and how long you’ve been accessing credit. Your income and assets don’t play into your score at all.
- If you pay off a collection, then it won’t hurt your score. Even if you pay off a collection, doing so isn’t going to raise your credit score for a while. The fact that you had a collection served on you will remain on your credit report for seven years unless the collection was under $100.
- You need to go into debt to build credit. Don’t ever think going into debt will build or improve your credit score. That’s simply not true. If you’re a recent college grad and are concerned because you have no credit history, then open a credit card account, make small purchases on it, and pay it off every month. No debt is required but you’ll still build a credit history!
- You only have one credit score. Not true. There are actually thousands of different types of scoring models for different purposes, so you might actually have dozens of different scores. A mortgage lender is not going to see the same kind of score you see when you request your own credit score for educational purposes.
- Credit bureaus give good and bad scores. Credit scores aren’t really good or bad; rather, they’re a measure of risk that lenders can use to help determine whether or not to qualify you for a loan. For example, you might have a relatively low credit score but a high annual income that could play in your favor when applying for a mortgage loan. Meanwhile, a high credit score isn’t of much use to you if you’re unemployed and receiving no regular income.
- Having a perfect credit score matters. No, not really. If your credit score is considered “very good,” like 760 or above, you’ll likely enjoy all the same benefits as someone with a score of 850, such as easier access to loans and lower interest rates.
- Student loans won’t affect your credit score. For better or worse, your student loans will impact your score, particularly if you’re late paying on them. They are lines of credit just like mortgage loans and credit cards and will, therefore, show up on your credit report.
- Using debit cards can help build your credit score. Debit and credit cards are two entirely different things. Your debit card is linked to a bank account and is not a line of credit. Therefore, your debit card and associated bank accounts won’t show up on your credit report or impact your score in any way.
- Selecting “credit” while using a debit card for a purchase will help raise your credit score. The same applies when selecting “credit” when you make a purchase with your debit card. No history of your debit card use will ever show up on a credit report because they’re linked to bank accounts, not credit accounts.
- The federal government owns the credit reporting bureaus. Credit reporting bureaus are actually private companies in which the federal government has no ownership. However, the federal government does protect your rights as a consumer under the Fair Credit Reporting Act, which guarantees you access to your credit reports as well as the opportunity to dispute information contained in them.
- Credit reports from the three main reporting agencies will all have the same information. Unfortunately, this isn’t true. Lenders aren’t required to report to all three bureaus or to any bureaus at all. Plus, each of the three main credit bureaus has their own algorithms for determining your score. So when you want to check your credit report, always check all three.
Next steps after credit repair
Once you feel your credit score is in good shape and you’re ready to start your home search, get prequalified for a mortgage loan by using OVM Financial’s QuickStart application process.