Clearing up myths about credit scores

June 8th, 2017 Ana Maria Senica

So what exactly is a credit score? What’s it used for? Do I have one? Do I need one? You may have lots of questions about your credit score, and that’s common.

Credit scores are very complicated and there are many myths surrounding them. But they’re very important for your future and gaining a better understanding of your credit score while debunking some common myths will help you set yourself up for financial success.

What is a credit score?

A credit score indicates your likelihood to repay a debt, based on your credit history, public records (such as bankruptcy) and credit inquiries (by creditors, not you). Why does this matter?

It is more than likely that at some point in your life you will need to borrow money – whether it’s to buy a house, a new car or fund an unexpected emergency. When you do, lenders will review your credit score to decide whether you have suitable lending risk. While a high credit score will deem you “creditworthy,” a low credit score may result in elevated interest costs or denial of credit.

Here are some of the most common myths about credit scores and why they are wrong.

Myth #1: Once a credit score is bad, it can never be rebuilt.

This is not true. Credit can be rebuilt – it just takes a little time. Your credit score is really a credit history, which means it doesn’t just show the way things are today; it keeps a record of all credit opened in a consumer’s name.

To rebuild a low credit score, pay your bills on time, pay off your credit card, look for better credit card options and educate yourself about credit and money. Additionally, the longer a credit history is without negative information, such as late payments, the better. That’s because the older negative information is, the less significant it becomes.

Myth #2: I’m not getting a credit card or loan, so my credit score doesn’t matter.

A solid credit score is a crucial component to a sound financial future. Your score will play a role in your ability to rent an apartment, qualify for a loan, buy a house or even get a job. It can also affect how much you’ll pay on interest charges, insurance and even cell phone contracts. In other words – your credit score impacts virtually all major financial occurrences throughout your life.

Myth #3: It will help my score if pay off my credit cards and close them.

The first half of that thought is true – paying off your credit cards is the best thing you can do for your credit score. However, closing your credit cards could have a negative effect. There are many factors that make up your credit score. Among them is your “credit utilization.” Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization is 30%.

The lower your credit utilization, the better. That shows you’re only using a small amount of the credit that’s been loaned to you.

If you close one credit card (even if you haven’t been using it) it will increase your credit utilization because your overall available limit will go down.

Myth #4: I won’t check my credit reports. It will hurt my credit score.

This is absolutely false. You can and should check your reports yearly for any inconsistencies. It’s only when creditors check your credit reports that it could hurt your score, like when you open a credit card or apply for a loan. However, it won’t dramatically affect your score.

Myth #5: If I pay off my debt, my record is clean and my credit score will be great.

Not exactly. When lenders review applicants, they look at four elements of a credit report: identification, account history, public records (bankruptcy filings, court records of tax liens) and inquiries. If you pay off your debt, your report will show that, but any late payments, loan defaults, etc. will all still be there – usually for seven years.

Myth #6: Incorrect or disputed bills won’t affect my credit score.

As unfair as it may seem, all unpaid bills/debt will show up in credit reports. Even if you’re in the right, not paying your bills doesn’t make the problem go away. The best thing to do is contact your creditor and have any issues resolved. If that fails, you may have to get a lawyer.

Myth #7: My low credit score doesn’t matter since my spouse has a great score.

When couples apply for joint accounts, the credit histories for both people are considered. Likewise, if you become divorced and still have a joint account, any late payments will show up on credit reports for both people.

Myth #8: Having debt on my credit card helps my credit score.

The only effect this has is that you will be paying interest that isn’t necessary. What improves your credit score is using and paying off your credit cards. So pay them off as soon as you can.

Building a solid credit history and credit score are an important part of managing your money responsibly. That’s why educating yourself about the facts of credit scores is so important. Feel free to talk with one of our professionals to learn more about credit scores. We’d be glad to help. Just contact us! If you are in need of credit advice do not wait, reach out to your local certified Consumer Credit Counseling Service.

About the author

Ana Maria Senica is Vice President and Regional Retail Manager at MidWestOne Bank.

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