I’m a Financial Expert: 6 Misconceptions People Have About Their Credit Scores
Some aspects of money management can get confusing at times, and one area that many people struggle with is building credit.
We all know that we should try to have an excellent credit score because we may have to provide it when applying for a loan in the future. However, figuring out how to build credit and what goes into a credit score can be challenging.
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Vanessa Alfaro is a financial expert and regional sales leader at OneAZ Credit Union. She shared the most common myths about credit scores that must be debunked.
What are common myths and misconceptions that people have about their credit scores?
Myth No. 1: You Can Hurt Your Credit by Checking Your Credit Score
“It’s commonly believed that checking your credit score harms your credit,” Alfaro said.
What’s the Truth About Your Credit Score?
“Routinely monitoring your credit score is imperative when trying to build credit to ensure you’re on the right track,” Alfaro explained. “Additionally, checking your credit score allows you to see what goes into the number itself, including amounts owed, payment history, new credit, credit mix and length of credit history.”
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If you don’t check your credit score, you won’t know where you stand so you can make moves to improve it. While you don’t want to check your credit score often, knowing what it is helps you accurately measure your situation.
What Should You Look Out For?
“Different types of credit checks can potentially damage your credit score,” Alfaro warned. “Hard credit checks occur when you apply for a new line of credit and lenders do a credit check to determine if you are eligible. Other types of credit checks are called soft credit inquiries, which do not affect your credit score in any way. Soft inquiries are only available on consumer disclosure reports, which are credit checks you do on yourself.”
Fortunately, several personal finance websites offer free credit scores and free credit reports to monitor information being added to your credit. Some include:
AnnualCreditReport.com
FreeCreditReport.com
FreeCreditScore.com
CreditSesame.com
By monitoring your credit score and checking your credit report, you can easily see in what category you’re lacking.
Myth No. 2: Your Credit Report Is Always Correct
“Another misconception is that your credit report is always accurate,” Alfaro said.
When you check your credit report, you may feel like you have to accept the information provided.
What’s the Truth Here?
“A Consumer Reports study found that a third of Americans discovered errors in their credit reports,” Alfaro said.
You can’t always rely on your credit report being completely accurate. This is why you must look into this occasionally to ensure that everything has been updated to reflect any changes. You also have to consider that human error is possible when inputting data. This is why the onus is on you to check your credit report to verify all of the information.
Myth No. 3: You Can’t Change Information on Your Credit Report
On a similar note, a common misconception is that you can’t change the information on your credit report since it has been reported to the credit bureaus.
What’s the Truth?
“Every American can get a copy of their credit report every 12 months from each of the three credit bureaus: Equifax, TransUnion and Experian,” Alfaro explained. “Once you have your three credit reports, you can look for debts you didn’t sign for, mistakes with missed payments or errors in the amount of outstanding debt. If you find any errors, you can contact the credit bureaus to dispute the mistakes online, by phone, or by mail.”
It’s essential that you review the information on your credit report as it directly impacts your credit score. If you find inaccurate or incomplete information about a specific account, you can contact the lender to fix this situation with the source. You also can file a free dispute with a credit bureau if you notice any incorrect information. They have 30 days to investigate and report back to you.
Myth No. 4: Your Bank Account Balance Determines Your Credit
“A common misconception is that credit scores are directly related to one’s amount of money,” Alfaro said.
You might think you can’t build your credit because you’re not rich or that having money in your bank account will automatically improve your credit score.
What’s the Truth About Your Credit Score?
“If you stopped borrowing money for a long time, you would have no credit score,” Alfaro said. “No matter where you are financially, your credit score has to be monitored and maintained.”
The logic that a higher credit score means you’re wealthy is a myth because that would mean that only rich people would have excellent credit. You can always improve your credit score, even when your income isn’t as high as you would like. This is why it’s crucial to build strong financial habits, such as proving that you can be trusted with credit by making your payments on time from an early age.
Myth No. 5: Minimum Payments Are Enough To Maintain Your Credit Score
“It’s frequently believed that paying the minimum amount on your monthly statement is sufficient for maintaining your credit score,” said Alfaro.
While you may feel confident about making minimum payments on your debt, it’s essential to note that this alone isn’t enough to build or maintain your credit.
What’s the Truth About Making Payments?
“Payment history matters as it’s worth 35% of your FICO score,” Alfaro said, “and paying the minimum amount due each month can prevent late payments and protect your credit score from damages.”
However, multiple factors make up your credit score, and your payment history isn’t the only aspect that matters. You don’t want to get into the habit of borrowing money just to make timely payments because you could end up with too much debt.
“Scoring models also consider other factors, such as the amounts you owe or credit utilization — the correlation between your credit card balance and credit limit,” Alfaro said. “These amounts owed make up 30% of your FICO score. A good rule of thumb is to keep credit utilization below 30%.”
Myth No. 6: Poor Credit Scores Make You Ineligible for Loans and Credit Cards
“Another myth is that a low credit score disqualifies you from any loan or credit card,” Alfaro said.
What’s the Truth About Your Credit Score?
“While you might not get approved for an exclusive platinum card with a low credit score, there are plenty of other options that people with lower credit scores can qualify for,” Alfaro said.
You’re not out of luck if your credit score isn’t where you want it to be. You don’t have to feel stuck with a low credit score indefinitely.
How Can You Improve Your Credit Score?
“If you have bad credit and want to take care of your debt,” Alfaro said, “make a repayment plan and apply for credit cards that you will likely get approved for, as having multiple lines of credit makes up 10% of your FICO score.”
Closing Thoughts
“Building credit can be an intimidating process,” Alfaro said. “Between obtaining a credit card, understanding appropriate card utilization and maintaining a high credit score, there’s a lot to juggle. That said, it’s important to be aware of the common misconceptions surrounding credit to best position your financial well-being.”
While building your credit can be complex at times, the good news is that you can always make small changes today that will positively impact your credit score in the future.
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This article originally appeared on GOBankingRates.com: I’m a Financial Expert: 6 Misconceptions People Have About Their Credit Scores
