May 13th, 2015
There is now a huge wealth of information available about credit scores, especially online. Unfortunately with this flood of information there are many myths and misconceptions about credit being spread. Not everyone is qualified or knowledgeable to speak about credit and these “facts” are causing lots of damage.
Here are some of the most popular and damaging misconceptions about credit:
Fewer credit cards are better for credit.
This is incorrect. In our 25 years of experience the highest credit scores we have seen are on credit that reflects many credit cards and varied types of active old credit. If you think about it logically it makes sense. If you were a lender would you rather lend money to an experienced borrower or someone whose experience is limited?
A borrower with a single credit card and a car loan could be a much higher risk than someone with 8 accounts. If 5 of the accounts were regular credit cards, 2 store cards, a car loan, a mortgage, and a student loan, as long as the individual with the 8 accounts has old average age of credit, a great payment history, and low balances on credit cards they clearly have had great practice in managing many accounts well and would be far more comfortable taking on another account. Of course they must have the appropriate income to cover making payments on the new loan or credit.
Checking your credit will reduce your credit scores.
If an individual checks their own credit it will not impact their scores AT ALL! They could run their own reports 40 times in a day and nothing would change on their scores. These credit pulls are called "soft inquiries".
Having your credit scores pulled by a third party will hurt credit scores dramatically.
For some, an extra third party inquiry (also called a “hard inquiry") will hurt scores dramatically and for others it will not. Since we are all scored differently there is no way to know exactly how much another third party inquiry will impact scores.
The varied impact is due to those with riskier profiles being scored differently than others. We are all categorized in groups based on similar factors on our credit profile. Once we are assigned our group we are given score cards that are used to calculate our scores. This means 6 inquiries in a 12 month period might impact my score more if I have 3 accounts that are 5 years old as opposed to someone with many credit cards and accounts that has been in the credit game for many decades. Hard inquiries remain on credit for 2 years but only impact credit scores for 1 year.
Income affects credit.
Your income has nothing to do with your credit score. Even if you have $7 million in the bank but are late on all your credit cards your credit score will be poor. Many high-net worth-individuals get very upset when they find out their credit scores are poor, because they assume having money will be reflected in their credit.
The bottom line is that credit scores reflect your payment habits, not how much money you have. Millions of dollars in your bank account are useless to lenders if you won’t pay them back. High-net-worth individuals should be concerned with having a great credit score to reflect their wealth and give the best financial options.
Balances under 30% of credit card limits will result in the highest scores.
The percentage of balance-to-limit ratio on revolving credit for the best scores is 10%. If balances are under 10% of aggregate and individual revolving credit account limits individuals will have the highest amount of points this credit category offers. Balances less than 30% will score positive and would be consider the threshold for positive scoring. 31-50% would be a safe zone, where scores will not increase or decrease. 51%% and the closer you are to the limit the more deduction you will see.
Authorized user accounts will not impact my credit.
If there are open active primary accounts on credit reports, authorized user accounts can impact credit in a positive or negative way. If the authorized account is older than current accounts, has a good payment history, and the balances are low the account can increase credit scores. On the other hand, if the account has a poor payment pattern, high balances, and it is brand new it will hurt credit scores. There was a time in 2008 that FICO wanted to change the scoring methods to ignore authorized user accounts but this was dismissed after reviews showed it would negatively impact many consumers that were legitimately sharing debt responsibility with spouses on these types of accounts.
If I pay my credit card balances off today it will show on my credit immediately.
Most credit card companies update balances to bureaus in the beginning of each month. If a consumer pays a credit card off on the 10th and applies for a mortgage on the 25th the high balances on credit cards can show and reduce scores. Credit does not update automatically the second something occurs. It could take 30 days to show up and even more time in some cases.
If my credit score is poor there is nothing I can do to improve it quickly.
This is one of the most destructive myths. Although there are some cases where nothing but time will help improve credit there are so many alternatives that can cause quick improvement. To start, reducing credit card balances (on revolving credit card debt) can generally increase credit scores from 2 to 100's of points depending on how high the balances are. Also, being added on as an authorized user to credit card accounts that are much older than the average age of credit on your existing credit profile could increase scores within 3-5 months.
Even a 2 point score increase can make a huge difference. If you are 2 points away from a 740 FICO score and 740 is the threshold needed to save in interest and pricing on a thirty year loan it could cost hundreds and thousands of dollars more over the life of the loan.