Common Myths About Personal Credit and Credit Scores
When it comes to your credit score, there are a lot of misunderstandings out there concerning what it is, what it is used for, and how to make it better. The following are seven common myths regarding credit and credit scores.
MYTH # 1: Whether or not you qualify for a loan is solely based on your credit score.
Lots of things get factored into whether or not a person is approved for a loan. Among those is your credit score, but it isn’t the only thing. Lenders often consider other factors such as how much money you make, whether you rent or own a home, and how long you have been at your job.
MYTH #2: You only need to monitor your credit score if you don’t pay your bills on time.
Paying your bills on time is one of the most important things a person can do to maintain and build a good credit score. However, it is not the only thing that can impact your score. Monitoring your credit score is the first line of defense against identity theft.
MYTH #3: The number of outstanding loans you have will hurt your credit score.
Don’t confuse the quantity of loans with the quantity of debt. Credit scores consider the amount of debt a person is in, but how many loans that debt is broken into is not factored in. More important than the number of loans is the amount of debt and how it’s managed. For example, I could have one loan for $200,000, and you could have 18 loans for a total of $5,000. My loan could potentially have a far greater impact on my score than your 18. It all depends on how we treat the loans, not how many we have.
MYTH #4: Only financial institutions even care about your credit score because they’re the ones lending money.
Lots of companies are interested in credit scores. Insurance providers, phone, cable, and other utility companies, and even landlords all have a vested interest in their customer’s credit history. Even though they may not be lending money, they are still involved with financial transactions that carry risk and depend on trustworthiness.
MYTH #5: Employers have the right to view a prospective employee’s credit score.
Some jobs have what are called “fiduciary responsibilities,” or in other words, responsibilities involving other people’s money. Employers need to know if candidates for those positions have anything in their past that could put them in a compromising position. So for reasons like that, employers are granted access to a restricted and a modified version of credit reports. However, they cannot see the entire credit report and do not have access to credit scores.
MYTH #6: Paying off debt will immediately improve your credit score.
The agencies responsible for collecting all of the information that goes into credit reports, called Credit Reporting Agencies (CRAs), have strict reporting schedules that they follow. As a result, there can often be a time lag between payments being made and changes to a credit report and score. In fact, there are some scenarios in which paying off debts entirely can actually lower credit scores.
MYTH #7: It’s always a good idea to use a credit monitoring and repair company.
There are many firms and services that can be used to monitor and repair credit scores. However, they are not always reputable. Nor are they always more effective than working with the CRAs directly. Many credit repair companies have a history of over-promising what they can produce. It’s been such a big problem in the past that it’s now illegal for credit repair companies to charge any fees upfront. Each CRA has a form on their website to use when disputing issues on credit reports. In addition, each CRA is required to provide one free copy of the entire report once a year directly to the report’s owner upon request.