Credit card scores – how they are collected, tallied and used – can be a murky process. As with all things that have a big impact on our lives that we can’t quite understand or control, humans have made up myths to try and make sense of it all. But, unlike the classical myths,believing one of these stories can have lasting, negative repercussions.
Credit Score Myth 1: The only credit score that matters is my FICO score.
FICO, which provides critical information to many lenders, isn’t the only game in town anymore. A recent study by the Consumer Financial Protection Bureau indicates that some lenders are using new score models, like VantageScore, as well as their own customized models to determine a consumer’s credit worthiness. Don’t underestimate the value of a strong FICO score, but you can also get solid information about your general credit worthiness by reviewing your credit reports from the three big credit bureaus each year, for free.
Credit Score Myth 2: I only need to check my credit score if I’m planning to apply for a loan
One in five consumers will find errors on at least one of their three major credit reports, according to the Federal Trade Commission. A significant error can cost you money, as you are probably paying high subprime interest rates on your existing line of credit. Additionally, it’s equally likely that good information about you may be missing, so check to make sure that information about your up-to-date your loans and credit card accounts do appear in your report. There’s good information available online that will tell you how to dispute incorrect information in your credit report.
Credit Score Myth 3: You should check your credit report monthly
Subscription services that comb through your credit reports on a seemingly constant basis may be worthwhile if your personal information was compromised in a data breach, such as the one that recently occurred at Target. While credit scores do fluctuate on a monthly basis, experts advise people not to obsess about these changes. Unless you’re actively working on rebuilding or improving your credit, you may want to just check your report quarterly, and before any major purchase or refinancing decision.
Credit Score Myth 4: Checking your credit report or applying for credit will damage your credit score.
There are two kinds of checks run on credit reports; a “hard pull” – made when someone is checking your credit worthiness – and a soft pull, checking your own credit report to view the information. Hard pulls can hurt your score, soft pulls have no effect. But credit scoring methods are being adjusted to reflect consumer’s increasing interest in shopping for the best deal, FICO, for example, gives you a 30-day window to rate shop, but some older methods of calculating FICO are limited to a two-week window. All hard pulls within those windows will count as one pull.
You have to use your credit, or risk damaging your score.
Lenders are interested in how much credit you have available, how much of that credit you utilize, and whether you pay your bills on time. Your score will typically be higher if you have two or three active lines of credit, keep your balances under about 35% of the total credit available to you, and pay promptly. Just don’t confuse “using your credit” with being overextended.