When it comes to your credit score, it’s important to separate the myths from the facts. However, most consumers still lack the basic ABCs about how their credit works, and the result is higher payments, missed opportunities, and, too often, credit mistakes that take them years to recover from.
So, today, we’ll expose these seven common credit myths – and bring you the truth behind them!
Myth: By closing your credit cards and other accounts, your score will go up.
It may seem like common sense that if you pay off your credit cards and accounts and then close them, your score will rise, but that’s not necessarily the case. In fact, the credit bureaus are in the business of gauging risk for banks, companies, and lenders, and they do so in large part by tracking your on-time payments every month. But when you pay off a card and cancel it, not only are you displaying volatility (which is risky), but you’re erasing an established record of on-time payments!
Myth: Opening new credit cards will automatically improve your credit score.
About 30 percent of your credit score is calculated based on your Credit Utilization, the ratio of debt balances to the total available credit. So, while opening a new card may improve your Credit Utilization(by increasing the amount of your total available credit), it’s not a guarantee that it will help your score. If you applied for several credit cards, those “hard pulls” or inquiries could lower your score, and the abrupt adding of new credit lines may also raise red flags with the credit bureaus, which see the sudden adding of new debt as risky. Furthermore, adding a well-established and credible credit card, like an Amex or good Visa, for instance, may help your score; but adding a store credit line, retail card, or other high-risk, low-quality account can drop your score.
Myth: If you don’t plan on buying a home or applying for new loans, you don’t really need a good credit score.
False! These days, our credit scores are used more than ever. For instance, your credit score not only factors into getting approved for credit cards, auto financing, student loans, etc. but dictates what interest rates you pay. Furthermore, your credit score impacts your insurance rates, renting an apartment, cell phone accounts, utilities, and even can help (or hurt) you from getting a new job!
Myth: When a couple gets married, their credit reports become one, too.
You may decide to conjoin finances with your new spouse and share bank accounts, credit card payments, and the like, but your credit scores will remain single. In fact, each person’s credit score is based on their own personal identity and Social Security number, so even with a last name change, your credit will remain your own. There is no “couple” or “married” joint credit report for married couples or anyone else.
Myth: The credit bureaus always report correctly.
This one is a definite fallacy! In fact, the credit reporting agencies are in business just to collect and sell your information, turning a tidy profit, so their number one priority is NOT to be a perfect steward of your information. Point blank, the credit reporting agencies make errors all of the time. The Federal Trade Commission recently found that at least 20 percent of all credit files contain at least one error, and duplicates, misspellings, outdated information, or other mistakes are very common on credit reports!
Even more frightening is the prevalence of identity theft, which is expected to affect at least 1 of every 8 consumers this year, and will show up as new credit cards, debt, and other accounts on a credit report.
Myth: How FICO calculates your score is a big mystery!
While the Fair Isaac Corporation’s (FICO) exact credit scoring algorithms are kept a secret, we do know exactly what factors go into your score, and even how they’re weighted for importance. In fact, your score is based on:
35% Payment history
30% Credit Utilization
15% Age of credit
10% Good mix of revolving, installment, and mortgage debt
10% New credit
Therefore, we know exactly what best practices will yield us a better credit score!
Myth: If you have bad credit, there’s nothing you can do but wait (and suffer).
It’s true that negative items can stay on your credit report for up to seven or even ten years (depending on what kind of negative blemish it is, like a late payment, collections, foreclosure, bankruptcy, etc.). But every consumer is legally entitled to dispute any item on their credit report, and the onus then goes on that individual credit bureau (Equifax, Experian, and TransUnion) to not only respond in a timely manner but prove that the item being reported is legitimate! And if they don’t (or cant)? Then, the negative item is removed from your credit report – and your score will go up, accordingly! In fact, this is the basis of legal and ethical credit repair.
Article Source: http://bluewatercredit.com/fact-fiction-credit-score-myths/
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