Your credit score can have a profound effect on your financial health. Without a good score, you may pay higher interest rates on loans and credit cards, or you may not be able to qualify for credit at all. Unfortunately, credit score calculations can be complicated, and many people misunderstand the way their score works. Below are six of the most common misconceptions you may have about your credit score.
1. Checking my own credit lowers my credit score.
When creditors pull your credit report with your express permission, it typically results in a “hard” inquiry that remains on your report for several years and may decrease your score. However, pulling your own credit report is considered a “soft” inquiry, and it will not affect your score. In fact, the Consumer Financial Protection Bureau recommends checking your credit on a regular basis to ensure that all of the information included on your report is accurate.
2. Closing a credit card account is good for my credit score.
In some cases, closing a credit card account may be a good decision, especially if it will prevent you from running up a debt you cannot pay. However, generally speaking, closing an account is not good for your credit score because it affects your credit utilization rate, which is the ratio of your outstanding balances to your available credit. When you close a credit card account, the total amount of your available credit decreases. If you are carrying balances on any of your other credit accounts, this will cause your credit utilization rate to increase. Higher credit utilization rates typically lead to lower credit scores.
3. My credit score is calculated by the credit bureaus.
The three credit bureaus Experian, Equifax and Transunion collect information about your credit and use it to compile written reports. However, they do not judge your credit or determine your credit scores on their own. Instead, your credit score is calculated using various scoring models developed by other companies, such as FICO and VantageScore. These scoring models take the information on your credit report into consideration and use them to assess your credit risk.
4. If I pay a bill late, my credit score will drop.
Missing a payment is never a good idea, but it won’t necessarily affect your credit score. For example, if you miss a payment on an account that isn’t typically included on your credit report, such as a utility fee or a medical bill, the late payment won’t affect your score unless the account goes into collections. For accounts that are included on your report, FICO states that missed payments are not factored into your score until they are at least 30 days late.
5. Bankruptcy will ruin my credit score forever.
Bankruptcy will undoubtedly lower your credit score dramatically, and it will remain on your credit report for up to a decade. However, although it is an arduous process, it is possible to rebuild your credit after bankruptcy. The bankruptcy’s effect on your credit score will lessen over time, and you will eventually qualify for new credit. Once you are able to open a credit account after bankruptcy, you can increase your score even more by handling the account responsibly and making all of your payments on time.
6. Shopping for a low interest rate will hurt my credit score.
When you’re shopping for a larger loan, such as an auto loan or mortgage, finding a lower interest rate can save you a significant amount of money. However, some consumers are hesitant to get quotes from more than one lender because they worry that multiple inquiries will harm their credit scores. Fortunately, Equifax reports that most scoring models will count multiple applications for the same type of credit as a single inquiry, as long as they are submitted within a 30-day period.
Understanding how your credit score works can go a long way toward helping you gain control over your financial future. Any time you engage in activities that may affect your credit, keep the facts above in mind.
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