I’m amazed at just how many misconceptions there are about credit scores. There are far too many self-proclaimed “credit gurus” out there and sorting through all the misinformation can be quite the struggle. Here are a few items to help set the record straight.
Myth #1: Credit Score used to qualify for employment
In some industries, for reasons more closely tied to security, an employer might request a credit report from you. A credit report may be used to screen potential employees, but only if you provide specific permission for the report to be accessed. Trans Union, Experian, and Equifax have gone on record stating that credit scores are never provided to employers. The myth that credit scores are used by potential employers comes from the fact that the terms credit report and credit score are often misunderstood. Credit scores and credit reports are two entirely different products.
FACT: Credit scores are never used by employers for employment screening purposes.
Myth #2: Spread out your balances to increase credit score
A considerable amount of information available online today directs you to keep your credit card balances below 30%. While this information is helpful, trying to spread your balances out across your cards is not. FICO along with many other credit scoring models use a wide variety of factors to determine credit scores.
One of the most important metrics on your credit score is revolving utilization. Having a credit card with a zero balance is likely to have a positive impact upon your credit scores since cards with zero balances have utilization at 0%. The utilization ratio is used to describe the relationship between your credit card balances and your credit card limits. If you are over utilized it is best to find a way to pay down your credit cards rather than spread out the balances. If you cannot afford to pay off your credit cards, a consolidation loan might be a consideration.
FACT: More cards with 0 balances will increase your score
Myth #3: My age of accounts is reduced when a credit card is closed
Credit scoring models will still consider the age of closed accounts when calculating your credit. Credit cards will continue to show and age years after they have been closed.
Closing a credit card account will not have any effect on the age of your accounts, but it can reduce your credit scores because closing the account will increase your utilization.
When you close a credit card account, the credit limit on that card will no longer be used to calculate your utilization. Utilization will likely increase as a result and your credit score will drop. So it’s better to keep your credit card accounts open.
FACT: Closing a credit card account will not reduce your age of the accounts.
Myth #4: there are only 3 credit scores
Credit scores exist to predict borrower risk, and different scoring models are designed to help predict different types of risk. Insurance companies review scores to help predict the risk of someone filing a claim. Lenders use scores to predict weather a consumer is likely to be 90 days past due on any account within the next two years.
There are scoring models that even predict the odds a consumer will file bankruptcy, or will respond to a credit card offer, or that you’ll be a profitable borrower. No one has just three credit scores. FICO alone has over 60 different scoring models commercially available from any of the three credit reporting agencies.
FACT: You actually have about 80 credit scores when you consider all of the different FICO and VantageScore credit scoring models that are commonly used by lenders.
Myth #5: Credit scores reward you for debt
The idea that you should carry a lot of debt to have a good credit score is entirely false.
This specific credit myth became popular because many self-proclaimed “financial gurus” spread the false idea that you have to be in debt in order to have higher credit scores. A clear understanding about proper utilization and management of credit quickly dissolves this fallacy.
30% of the FICO and VantageScore credit scores are driven from the amount of debt on credit reports. The fewer accounts you have with balances, the better it will be for your credit scores. The more debt you have and the more accounts with balances, the lower your scores will be.
FACT: Credit scores will fall lower as you increase debt.