Credit Scores: Myths & things you should know!

There are a lot of myths out there about credit, so I am here to set the record straight.

What’s a good credit score?

BAD, 350 – 599: An individual with a score between 300 and 599 has a significantly damaged credit history.  This may be the result of multiple defaults on different credit products from several different lenders. However, a poor score may also be the result of a bankruptcy, which will remain on a credit record for seven years for Chapter 13 and 10 years for Chapter 11

POOR, 600-649: Borrowers with credit scores ranging from 550 to 649 are thought to be in the “poor” category.  They may have some dings on their credit history, but there are no major delinquencies. They are still likely to be extended credit by lenders but not at very competitive rates.

FAIR, 650 – 699: Having a credit score between 650 and 699 places a borrower near or slightly above the average of U.S. consumers. While they may still earn competitive interest rates, they are unlikely to command the ideal rates of those in the two higher categories, and it may be harder for them to qualify for some types of credit. For instance, if a borrower is looking for an unsecured loan with this score

GOOD, 700 – 749: A credit score between 700 and 749 indicates a consumer is generally financially responsible when it comes to money and credit management. Most of their payments, including loans, credit cards, utilities, and rental payments, are made on time. Credit card balances are relatively low compared with their credit account limits.

EXCELLENT, 750 – 850: Consumers with a credit score in the range of 750 to 850 are considered consistently responsible when it comes to managing their borrowing and are prime candidates to qualify for the lowest interest rates.

What affects my credit score?

Payment history: This refers to how often you have a late payment and is the most important factor, accounting for 35% of your score.

Credit utilization: This is around 30% of your score and takes into consideration how much of your available credit you’re using. Rule of thumb is to never owe more than 30% of your credit limit.

Age of Credit: The older your credit accounts are, the better. This shows a long-term history of responsible financial management and accounts for 15% of your credit score. More than 10 years is considered excellent.

Account Types: A few revolving accounts such as credit cards as well as installment accounts such as car and home loans show lenders you’re responsible in managing multiple types of debt. Your credit mix contributes to 10% of your score.

Inquires: When you apply for credit, lenders typically do a hard pull on your credit, which results in an inquiry on your credit report. The more inquiries you have, the lower your score because lenders get nervous when they see someone applying for multiple lines of credit at once. This accounts for 10% of your score.

Checking your credit hurts your score

Using credit sourcing services like Credit Karma and Experian will not hurt your credit score. When you apply for credit cards or loans from lenders and your credit is pulled this is known as a hard inquiry, these types of credit inquires will hurt your scores. Checking your score through credit sourcing services is something you should get in the habit of. You can find suggestions and tips on how to improve your score that are specific to your credit. While Experian is more accurate than Credit Karma, Credit Karma is a good source to know if your score is increasing or decreasing.

You have to make a lot of money to have a good credit score

Your credit score is not influenced by your income or money you have in your savings. However, your ability to pay the bills you have is affected by your income. If you budget, live within your means, create healthy spending habits, and pay your bills on time, this will help improve your credit score -no matter what your income is.

A bad credit score lasts forever

A credit score can always improve, so long as you do not continue to make decisions that have negative effects on your credit score. i. e., late payments, maxing out credit cards, letting bills go to collations, etc. If you pay your bills on time and keep your credit cards below a 30% utilization you will see an increase in your score.

Getting married will merge your credit scores

Credit scores are based on the individual. However, it is important to keep in mind that any joint accounts, like a mortgage or an auto loan can effect BOTH partners scores. Your partners bill paying habits can positively or negatively impact your scores because you both are on the loan, ‘joint account’.

If I have bad credit, I won’t get approved for anything

Although a bad credit score makes getting approved more difficult it will not stop a lender from approving you. A lender looks at an overall creditworthiness, credit score, income, and your debt-to-income ratio. If a lender approves you with a lower score, they might increase your interest rate or require a down payment.

Closing a credit card will improve your score

WRONG. Your credit card utilization accounts for 30% of your overall score. This means, if you have 3 cards, giving you a total credit limit of $10,000 and you have $1,200 on one card, $1,800 on another, and a zero balance on the third card, you are at 30% utilization ($3,000 of $10,000). If you close the third credit card with a zero balance that had a credit limit of $4,000. Your credit limit just dropped to $6,000 with a $3,000 balance, you are now at 50% credit utilization. You also want to keep in mind the length of credit history, although this isn't one of the biggest factors in your overall score it does affect it. If the card you close is the credit card you have had the longest, this will hurt your score. Keeping this card open will actually help your score even if it’s not being used. If a card is not used for a long period of time the card company might close your account. To avoid your account being closed, use the card once or twice a month on groceries or gas and then pay it off.

Applying for new credit will hurt your score

This is true; HOWEVER, it may only negatively impact you for a short amount of time. Remember when I mentioned your credit utilization? Well, adding a card will have a positive impact on your credit limit—just don’t open too many at once. When shopping for a mortgage or auto loan it is important to shop in a 14 day window, that way credit bureaus can see your shopping for the best rate and that you’re not trying to open multiple lines of credit.

You need to go into debt to build good credit

Opening a credit card is a simple way to build good credit. Charge a small amount to the card each month, keeping in mind the 30% utilization rule, and then pay it off. You do not have to take out a loan to build your credit. One great place to start your credit is at your local credit union, they tend to have lower interest then other cards out there and can also start you with a secured credit card if you have a 0-credit score.

It takes seven years to improve bad credit

Although, negative information can stay on your credit reports for seven years, as time goes by it will impact your score less. Even with negative information on your credit reports you can improve your score rather quickly if you’re making on time payments and staying under 30% utilization. When applying for credit a lender typically looks at your last two years of credit.

Debt is debt

Not all debts are equal. If you have $150,000 debt because you maxed out all your credit cards, then you will see a negative impact on your credit score. However, if the $150,000 debt is a Mortgage, then you’re like millions of other responsible homeowners out there. There is a difference!

There is only one credit score

This couldn’t be further from the truth. Three are 3 credit bureaus: Experian, Equifax, and TransUnion. Each bureau can show a slightly different score. Each Credit Report receives and reports different information. Experian 300—850 Equifax 280—840 TransUnion 300—850

How are fico scores different then a credit score?

You also have your FICO Score; there are many different FICO Scores out there. Each FICO Score uses different data. For example, the newest FICO Score 9 considers any debt consolidation. Where other FICO Scores did not account for debt consolidation. Lenders will use different FICO Scores depending on what your line of credit will be for because each process different information. Example: a mortgage lender may look at FICO Score 2 where an Auto lender may look at FICO Score 8 and FICO Score 4 because these FICO scores don't report your mortgage but instead focus on revolving debt and recreational loans/auto loans.