These FICO credit score myths can keep you from getting the money you need, a good job or even a roof over your head
Your FICO credit score is one of the most important parts of your financial life. It can help you find your dream home, get you cheaper rates on insurance and even help you land a job.
Unfortunately, there is a lot of fake news about credit scores. I’ve seen FICO credit score myths passed off as fact to bully people into bad credit loans and debt negotiation.
Your credit score doesn’t have to be something you worry about and it’s a lot easier to build good credit than you may think. In each of these credit score lies, there is a lesson in how to improve your credit and get the money you need.
Basic Myths about Your FICO Score
There are some FICO credit score myths that get to the very definition of your score and what it means to your finances. Understanding your credit report and FICO score is the first step in beating these credit myths.
I Have Just One Credit Score
There are actually three companies that collect your financial information for credit reports. Some lenders will report your loan payments to all three or just one. Most of the information on your three credit reports is going to be exactly the same but there could be some differences. That means the credit scores based on these reports will be different as well.
Just as some lenders only report to one credit bureau, they may only rely on the information from one bureau and the credit score it provides.
Everyone Has a Credit Score
Your credit score is based on your loan history. If you’ve never applied for a loan, you won’t have a credit score. This is a problem for many younger people and for those right out of school. It can make it nearly impossible to get a loan because they don’t have a credit score.
Credit cards get a bad name because people overuse them but they can be a powerful tool to building your credit score. Even if you are able to pay for everything with cash, get a credit card and use it for essentials like food. Pay it off every month and start building your credit so you can get money when you need it.
One new loan website has come out to help people with no credit score, especially new graduates. Upstart uses special lending criteria to approve people for personal loans up to $50,000 – See if you qualify for a loan from Upstart
I Can Get My Credit Score Free Once a Year
This is probably the biggest credit score myth and catches a lot of people. Through the Fair and Accurate Credit Transactions Act (FACT Act), you have the right to get your credit report free from each of the three credit bureaus. You can claim your free credit report by going to AnnualCreditReport.com (Note, this is the only site that is truly free).
Your credit score is different and not covered by the law. Your credit reports will show you the credit history on which your score is based but they WILL NOT include your credit score. There are two ways to get your credit score cheaply or even free.
- Some credit card companies will show your credit score as long as you have their credit card – Check out these cards by USAA
- Many credit monitoring services offer free trials to check your score or a trial fee of $1 like this one from credit bureau TransUnion
Credit Scores are Unfair to Women and Minorities
It’s illegal to deny someone a loan because of their race, gender or sexual orientation. The Equal Credit Opportunity Act (ECOA) lays out your rights as a borrower and banks denying a loan can get in big trouble.
Your credit report and score is based only on financial information. It includes how many loans you have, how many times you’ve been late making payments and other credit-related information. If you are being turned down for a loan, look at your credit report first to make sure there are not a lot of problems with your credit history.
FICO Credit Score Myths About Loans
The biggest credit score myths are those around getting loans and how your credit report affects interest rates. It's here that shady loan dealers want to feed you their credit score lies to scare you into a high-interest rate.
I Don’t Use Loans so I Don’t Need Good Credit
Your credit history and score are used for a lot more than just getting a loan. Car insurance providers are allowed to charge higher premiums for people with no credit or bad credit. Employers and potential landlords will often look at your credit history to decide whether to give you a job or allow you to rent a house.
Don’t be scared of bad credit or stay away from credit. Everyone at some point in their lives needs their credit score so it’s best to get started as soon as possible and protect your score.
My Credit Score Determines if I get a Loan
Lenders only look at my credit score to decide if I get a loan. This loan myth is understandable but still totally wrong. A lot of factors go into the loan decision besides just your credit score.
Lenders look at your ability to pay the loan back based on your monthly income and current bills. They also look at your credit report which shows how often you make on-time payments and the types of loans you have outstanding. Some lenders may even look at your employment history, type of job and how long you’ve been at the same company.
Finally, not all lenders use your credit score and these other factors the same. Some banks may have super-strict loan policies while others may be able to extend loans even to bad credit borrowers.
People that Make More Money Have Higher Credit Scores
Your monthly income isn’t even on your credit report and has nothing to do with your score. Where most people get confused is the debt utilization part of your credit score. This is the amount of debt you have borrowed versus the total amount of debt you have available (not your monthly income).
If you have $5,000 charged on all your credit cards but the limits add up to $10,000 then you have a debt utilization of 50% or ($5,000/$10,000).
People also get confused because lenders ask them to fill out monthly income on loan applications. Your income may not affect your credit score but it does affect whether you get a loan. Banks and other lenders will look at your monthly debt payments compared to how much you make to decide if you have enough money to pay the loan back.
My Credit Score Will Drop if I Apply for a Loan
This is true and false. Applying for loans will not affect your credit score within a short period, usually less than a month. Lenders understand you are just shopping around for the best deal on a loan and multiple loan inquiries will not hurt your score.
There are two ways that applying for multiple loans will hurt your credit score. More than 30 days after you apply for multiple loans, your score might decrease a little. Credit inquiries is a very small part of the credit score measure.
Your score will fall much more if you take out multiple loans or if any are for a large amount. Credit scores are based on how much you owe and how much you make each month. Taking out a lot of loans will mean you owe much more against your ability to pay and your credit score will fall.
Myths about Improving Your Credit Score
Improving your credit score means understanding the facts about your credit report and what you can do to boost your score.
A Bad Credit Score Will Affect My Life Forever
Your credit score is based on all the loans and history in your credit report. Since your credit report is always changing as you get new loans and pay off old debt, your credit score changes with it. That means bad credit isn’t the end of the world or something you’re stuck with forever.
It’s true that when you miss a payment for more than 60 days, it affects your credit score and will be a problem for a long time. Loan payments that are more than a couple of months late can stay on your credit report for years even after you make the payment or pay off the loan. A bankruptcy can stay on your credit report for up to 10 years.
The fact that bad marks on your credit report can stay there for a long time makes it even more important to keep current with payments. If you miss a payment, contact the creditor to tell them it’s on the way and get it in before the end of the month. It’s much harder to fix bad credit than it is to protect your good score.
You Can’t Change Your Credit Report
Loans and other credit information get reported directly to the credit bureaus but sometimes a mistake is made. A survey by the U.S. Public Interest Research Group found that as many as eight in every ten credit reports had a mistake.
Since even a missed payment can hurt your score by 20 or 30 points, meaning thousands more in interest payments, you need to check your credit reports each year for mistakes. It’s your right to get mistakes removed and fix your credit score. All you need to do is write to the credit bureau and tell them how the report is wrong.
Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 2000
Chester, PA 19022
Experian National Consumer Assistance Center
Address: 475 Anton Blvd.
Costa Mesa, CA 92626
Checking My Credit Report More than Once a Year Will Hurt My Score
Applying for a lot of loans will eventually hurt your credit score, though it doesn’t happen all at once. This is because applying for credit is marked on your report as an inquiry and is something lenders watch when deciding to give you a loan. Lots of loan inquiries make it seem like you’re scrambling for money.
Checking your own credit report will not affect your credit score. There are credit monitoring services you can use that will update your score each month and alert you to identity theft. These are all good things because they help you protect your credit score.
Don’t trust everything you hear about your credit report. FICO credit score myths range from harmless to blatant falsehoods designed to take advantage of bad credit borrowers. Make sure you have all the facts about your credit score so you don’t get locked out of getting the money you need.