Credit Scores and reports get mixed reviews when it comes to consumer opinion and the slew of sites available to ‘help’ consumers are not short of misinformation or untrue myths. Understanding your credit score and the information contained in your report can be the difference between credit wellness and unintentionally damaging your credit scores.
Some of the myths that are floating around are as old as the internet and likely to stick around without proper consumer education. What do you need to know to keep your credit scores healthy and your lending power high? Let’s explore.
[Read: Your Rights With Credit Reports]
Your Credit is a Reflection of your Spouse’s Credit and you only have one.
This is incorrect and untrue. This myth has been one of the most frequently listed misconceptions among the FAQ pages of lender sites and consumer awareness information sites. From the beginning of my career and the start of researching actual credit awareness, I found that the most common misconception is that married couples not only share their scores but they also only have one. It makes sense, one person one score but this is not the case and it is wise to know the way credit works, prior to applying for it.
Credit is not a one and done situation where all people have one score and when they combine their last names, they combine their credit. Thankfully for the credit savvy who marry the not so up to par on credit spouse, they don’t become a victim of their spouses credit scores. If that were the case more people would be held back from school loans, home loans, and car purchases. Luckily that is not the case and each person has three scores with the average score or mid-FICO being calculated as the average of these three.
The credit bureaus are separate entities that operate in a similar fashion though not all creditors receive the same information. This is because some companies may report to all three bureaus while others may report to one or two at most. The key items to remember when establishing and maintaining credit is;
- There are three bureaus TransUnion, Experian, and Equifax.
- Companies are not required to report to all three. They can choose one, two, or none.
- Married couples do not share a single score
- Consumers, in general, have three scores
Damaging your score by not having credit
Consumers also seem to believe that if they live a cash lifestyle and avoid debt all together it will look better on their credit report. However, lenders want to see a good mixture of debt and an understanding of how credit works based on payment history and account age. While there is nothing wrong with living life debt free, carrying some debt is not always a bad thing so long as it is the right kind of debt. Great examples of debt that is not counted against you are;
- Car Loans
- Mortgage Loans
- Student Loans
However, having high credit card balances and debts may send up a red flag. Also understanding that student loans although not due initially until the end of your college career are counted as payments you need to make in the future. Having these will not adversely damage your credit score but it may unintentionally lower your score if not managed properly.
Lowering your Limit Could Lower Your Scores
It sounds like a great idea when you’re going over your credit report and notice you have a high account limit on one of your cards. To avoid overuse or misuse, you may think it a great idea to have the limit lowered and save yourself the heartache of potentially abusing the limit to a point that payment is difficult and you’re carrying a higher balance than you’re comfortable with. This is a mistake. Creditors look at your limits and usage and compare these to see if you can handle credit. If you lower your limit this could potentially be [and unintentionally] damaging your credit score since the lower limit now looks like you’re carrying a higher balance, even if you didn’t change the balance at all. Ultimately you want to
- Increase limits
- Keep or lower balances
- Utilize less than 30% of debt
- Make payments on time
- Payoff full balance when possible
Reducing Accounts Could Lower Your Scores
Another instance that may seem like a smart move but is a source of damaging your credit score unintentionally is closing account especially older accounts in good standing. Creditors are looking at your history and credit usage and in order to determine this check the age of your accounts along with the balances and limits. If you’re closing your oldest account, this can drop your score drastically because now your report appears too immature and inexperienced with credit. Avoid a headache and keep those green accounts going.
Opening Retail Cards and Carrying Small Balances Can Cost You
It’s been said [incorrectly] that maintaining a small balance each month on your cards is a way to show you have great debt management skills but the truth is the less you carry the better off you look. Opening too many accounts is also another unintended hit against your score. Having four retail cards with a balance only alerts the lenders that you’re not in control of your credit and have insufficient skill to maintain your current debts. It’s always best to;
- Maintain $0 balance on all accounts
- Avoid opening too many new accounts
- Pay balances in full whenever possible
Shopping Around can [accidentally] Bring Scores Down
Finally in solving the damage we do to our credit accidentally is bringing our scores down by shopping around. When applying for loans getting the best interest rates and pricing is the goal but what happens when all of the inquiries triggered are added to credit reports? Scores lower thanks to the dings that are created with every check. Keeping all inquiries for the same products (i.e. cars, home loans, etc.) within a two-week time period (or 14 business days) will lessen the blow but it can still bring your scores down. Shopping around may be the smartest way to shop to ensure you’re getting the best loan for your dollar but make sure you’re shopping smart when sending out those invitations to look at your credit history.
[Read: Your Rights With Credit Reports]
While all of the rumors and myths are unlikely to go away anytime soon being educated on how you effect your own score will give you the upper hand when it’s time to actually apply for that needed loan. Keep in mind the tips here and you’ll be a credit rock star.