The formula for what makes up your credit score is somewhat obscure. Here are a few credit myths even smart people believe.
MYTH: You make your payments on time, so your credit score is awesome.
TRUTH: 70 percent of credit reports have errors on them, sometimes because of someone else sharing your name. Getting a free credit report each year is crucial to making sure everything about your finances is getting reported accurately. Using annualcreditreport.com, you can get one free credit report from each bureau per year, and then call to dispute incorrect information and repair your credit. And do check on all three bureaus — not all creditors report to all three bureaus, so each report may be different. Avoid using freecreditreport.com, which charges you a monthly fee after signing up and may only provide a report from one bureau.
MYTH: Your credit report includes your score.
TRUTH: A credit report will only tell you about your credit history, rather than give you that magical/unmagical three-digit number. Consumer advocates are trying to change this, but for now you may only be able to find out your credit score by applying for credit.
MYTH: Getting turned down for a credit card crushes your credit score.
TRUTH: While any credit inquiry does lower your score by a few points (usually five or less), the fact that you got rejected doesn’t show up on your credit report. If you do get accepted, you score will likely rise due to your now-more-favorable credit utilization ratio, so applying for more credit here and there isn’t something to bite your nails over too much. A large number of credit inquiries over the past 12 months can hurt your credit significantly (with the past 6 months holding the most weight), so don’t go crazy — luckily personal reviews of your credit don’t count. If you apply for a credit card and get rejected, wait a couple of months before applying for something else. Too many inquiries — even if they are accepted — make you look like a “credit seeker,” which doesn’t look great on a loan application.
MYTH: Revolving and paying off a (large) balance always helps your score.
TRUTH: About 30 percent of your credit score depends on your current debt-to-credit ratio. Try to keep your credit card debt around or under a third of your limits. To improve your credit, it could be a great idea to ask for a credit increase on a card or two, since this can improve your score by decreasing your credit utilization ratio. Only ask for an increase if you haven’t applied for a number of credit cards in the last few months — especially if those applications were rejected.
Misinformation about what actually affects your credit score — and by how much — abounds, so don’t trust everything you hear. Using a little credit and keeping up on your bills ensures that your credit score will mostly take care of itself — but do check your credit reports annually.
