Did you know credit scores are a more recent development than you think? Introduced in 1989, your credit score calculates your creditworthiness based on various factors, like your payment history and the length of your credit history. It’s important to understand how your credit score can impact your life, so keep reading as we debunk six myths about credit scores.
1. Myth: Your income and your credit score are related.
Reality: Your bank account is not a reflection of your credit score—and vice versa.
Your income doesn’t impact your credit score at all and isn’t included on your credit reports. Income is a wealth metric, along with things like your debt-to-income ratio and net worth—none of which are factored into your score. But if your income isn’t included in your credit score, what is? Factors typically included are:
- Your bill-paying history
- Your current unpaid debt
- How many loans you have and what type
- Length of your credit history
- How much of your available credit you’re using (credit utilization rate)
- New applications for credit
- Whether you’ve had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago
On the other hand, having a good credit score doesn’t necessarily mean you have more money, either. While a higher salary may secure you a higher line of credit, you may find yourself dealing with lifestyle creep, leaving you more in debt.
2. Myth: You don’t need to worry about credit scores until you’re older.
Reality: Start keeping track of your credit score as soon as you turn 18.
Among the many joys of turning 18 comes the ability to apply for credit. As mentioned above, the length of your credit history is one of the factors in your credit score, so it’s recommended that you start building credit as soon as possible. Part of adulting is taking on utility bills and renting an apartment—things you can only do with a history of (good) credit. Your credit could even affect your employment! But with credit comes great responsibility—checking your credit score. You can see your credit score for free at any time if you sign up for sites like Credit Karma, and some banks offer a free credit score checkup, too. For your full credit report with detailed breakdowns, you can go online at annualcreditreport.com. Per the Consumer Financial Protection Bureau, this is the only authorized online source under federal law that provides free credit reports from all three major national credit reporting companies. In fall 2023, a program was extended to allow you to check your credit report weekly for free, though most experts suggest viewing your credit report at least once a year. And down the road, when you’re planning to make a big purchase, like a car or house, you should keep an eye on your credit three to six months in advance.
3. Myth: There’s a singular overall credit score.
Reality: There are actually several different scores.
While we often refer to your credit score as a singular thing, there’s actually a few scores. Like we previously mentioned, there are three major national credit reporting companies—Equifax, Experian, and TransUnion—and each company calculates the scores differently. Moreover, not all lenders or creditors report all their data to all of the credit bureaus, so you’ll often see differing scores among the credit bureaus.
4. Myth: Maxing out your credit card monthly isn’t an issue as long as you pay it off.
Reality: Your credit utilization rate matters.
Credit cards can be a helpful way to pay your bills while earning extra rewards. But maxing it out each month may be more problematic than you realize. One of the factors used to calculate your credit score is your credit utilization rate, which is how much credit you’re using compared to the total amount available to you. If you’re constantly maxing out your card, even if you pay it off regularly, your ratio will likely be a lot higher which can negatively impact your credit score.
5. Myth: Paying off debt increases your credit score.
Reality: It’s more complicated than that…
While debt often gets a bad rap, not all debt is created equal. Installment debt, like mortgages or student loans, is when you borrow a lump sum and repay it in fixed amounts. Paying off installment debts can actually ding your score as it reduces your totally number of credit accounts. That said, you should still work to pay off your loans—no need to pay extra interest when your credit score will recover. On the other hand, credit cards are revolving debts, where you have an ongoing line of credit that you borrow from as needed. As such, paying off credit card debt is a good way to improve your score. Do your best to avoid closing your card though—closing your card may actually lower your score because it reduces your overall available credit (and your credit history length if it’s an account you’ve had for a while). While sometimes canceling a card is necessary, such as one with a high annual fee, you may be better off with a balance transfer to avoid the hit.
6. Myth: Your score is set in stone.
Reality: You can change your score—and update your credit report, too.
The good news is that a bad credit score doesn’t have to last forever. Everyone makes mistakes, and your score will change as you work to correct them and time passes. Additionally, as more information is added or removed, your score will also change. Removed? Yes, you can remove things from your credit report! If you’re in good standing overall but have gotten yourself into a jam due to a one-time issue, you should consider sending a request for “goodwill deletion.” Of course, the creditor can still deny this, but it’s always worth a shot. Additionally, if you see information on your credit report that you don’t recognize, you should reach out the appropriate lender or creditor as soon as possible. This could be the result of fraud, an information leak, or simply incorrect information. You can also file a dispute with the appropriate credit bureaus.
Key takeaways:
- Start keeping track of your credit as soon as possible.
- There are three major credit reporting bureaus, and you should check them all at least once a year.
- You have the power to change your credit score.
Credit scores seemingly impact everything, and it can be confusing to understand what your scores mean. But understanding the factors that go into your score and ways to keep your score up can take some of the stress out of credit. Don’t forget to regularly check your score and pull your full report at least once a year. Most importantly, don’t stress too much about a bad credit score—you have the power to change it. We hope this breakdown helps you feel in control of your credit. Do you have an awesome credit score? Share your tips for success in the comments!
