Understanding Credit Scores: Myths and Realities

A credit score is a numerical representation of your creditworthiness and plays a critical role in many financial decisions. However, there are several myths and misconceptions surrounding credit scores. Let’s break down some of the common myths and the realities behind them to help you better understand how credit scores work.

Myth 1: Checking Your Own Credit Score Will Hurt It

Reality:

Checking your own credit score is considered a soft inquiry and does not affect your score. Soft inquiries occur when you check your credit, apply for pre-approved credit offers, or even check your credit report for accuracy.

Hard inquiries, which happen when you apply for new credit, can impact your score, but self-checks are harmless.

Myth 2: Closing Old Accounts Will Improve Your Credit Score

Reality:

Closing an old credit card can actually hurt your credit score. Here’s why:

Length of Credit History: Older accounts help improve the length of your credit history, which is a factor in your score.
Credit Utilization: Closing an account reduces your overall available credit, potentially increasing your credit utilization ratio (the percentage of available credit you’re using), which can lower your score.

It's usually better to keep old accounts open, even if you don't use them often, unless there’s a good reason to close them.

Myth 3: Paying Off Debt Will Immediately Boost Your Score

Reality:

Paying off debt may improve your credit score, but it won’t necessarily happen right away.

Credit Report Update: Credit scores are updated based on the information in your credit report, and it can take time for changes like paying off debt to be reflected.
Other Factors: Your score is also influenced by other factors, like your credit history, types of credit, and recent credit inquiries. Even if you pay off a loan, other parts of your credit profile can affect the outcome.

It’s a positive step, but results can take a few months to show up.

Myth 4: A Credit Score of 800+ Is Necessary for Good Credit

Reality:

While an excellent score (typically 750 or higher) is great, you don’t need a perfect score to have “good” credit.

Scores above 700 are usually considered good or very good by most lenders.
Scores of 750 or above are considered excellent and give you access to the best loan rates, but a score between 700 and 749 is still very strong.

The key is maintaining a score in the good range and keeping your credit utilization low, paying bills on time, and managing debt responsibly.

Myth 5: All Credit Scores Are the Same

Reality:

There are several different credit scoring models (e.g., FICO and VantageScore), and they may have slightly different scoring ranges and criteria.

The FICO score is the most commonly used, with a range from 300 to 850.
The VantageScore model uses a range of 300 to 850 but has different factors that may weigh certain data differently.

Your credit score can also vary slightly between different credit bureaus (Equifax, Experian, and TransUnion) because they may have different data on your credit history.

Myth 6: Paying Bills on Time Doesn’t Affect Your Credit Score

Reality:

Paying bills on time does significantly affect your credit score.

Payment history is the most important factor in your score, accounting for around 35% of your FICO score.
Missing or being late on payments can seriously damage your score, while consistently paying on time helps you build a solid credit history.

If you’re trying to improve your score, focusing on timely payments should be your top priority.

Myth 7: Student Loans Don’t Impact Your Credit Score

Reality:

Student loans do impact your credit score.

If you’re making timely payments, student loans can have a positive effect on your credit.
However, missed payments or defaulting on student loans can significantly hurt your score.
The balance, repayment status, and whether you’ve deferred your loans can also influence your score.

It’s important to treat student loans like any other form of credit and manage them responsibly.

Myth 8: Carrying a Balance on Your Credit Card Helps Build Credit

Reality:

You don’t need to carry a balance on your credit card to improve your score.

In fact, carrying a high balance can hurt your score, as it increases your credit utilization ratio.
Paying off your balance in full each month and keeping your utilization under 30% can have a positive effect on your credit score.

If you can pay off your balance every month, it shows lenders that you’re responsible with credit.

Myth 9: Your Credit Score is Only Affected by Debt

Reality:

Your credit score is influenced by many factors, not just debt:

Credit History: The length of time you’ve been using credit.
Credit Mix: Having a variety of credit types (credit cards, installment loans, etc.).
Credit Inquiries: Too many hard inquiries in a short time can lower your score.

Debt is an important factor, but it’s not the only one that determines your creditworthiness.

Conclusion

Understanding credit scores can be confusing, but debunking common myths helps you make better decisions for your financial health. Keep your credit utilization low, pay your bills on time, and regularly monitor your credit reports. By following sound practices, you can maintain a strong credit score and access the best financial opportunities.

If you need further clarification or tips on improving your credit score, feel free to ask!

Understanding Credit Scores: Myths and Realities