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Top 10 Credit Score Misconceptions

by J. Money on Thursday, May 27, 2010

My credit is so bad!
*Guest Post by Credit Karma

When I get married, do we get a joint credit score? If I get a raise at work, will my credit score go up? These are common questions asked everyday by many Americans because credit scores are seemingly arbitrary numbers and credit reports are lengthy and unintelligible. It’s often difficult to separate fact from fiction.

To help consumer’s better understand how credit works, Ken Lin, CEO of Credit Karma, has put together a list of the top 10 credit score misconceptions. These misconceptions included credit score myths that many people expect to impact their credit score, as well as some factors that actually impact credit scores that aren’t common knowledge.

Things You Expect that Don’t Happen:

  • When I get married, we get a joint credit score: Not so. Each person has their own credit score ’til death do you part. However, when you open accounts jointly, that information will be reflected on each of your credit reports, for better or for worse.
  • My job/income impacts my credit score: Sorry, but making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score. Your net worth and income are not factored into your score.
  • Paying off credit card debt will boost my credit score 50 points: Depending on how much credit card debt you had, you may see some increase. However, credit card utilization is an important component of your credit score and those with the highest credit scores have about 10% utilization.
  • Being an authorized user on a credit card will impact my credit score: Co-signing for a credit score can have an effect on your credit score, but unfortunately just being an authorized user won’t change your credit score one point.
  • I only have one credit score: There are several different credit score providers and each credit bureau provides their own credit score. However, these companies all use the same criteria to judge your credit worthiness and the scores basically fall within the same range of each other (good, ok, or poor).
  • Checking my credit score will lower my credit score: False. When you check your credit score at sites such as Credit Karma, it’s a soft pull so it won’t lower your credit score at all. Only hard inquiries by lenders impact your credit.

Things You Don’t Expect that Do Happen:

  • If you don’t use your credit cards, your credit score won’t change: In order to have a good credit score, you must have credit available to you and use it responsibly. If you don’t have or use credit, you may have no credit history at all and if you do, your credit score won’t be as good as someone who consistently demonstrates responsible use of credit over time.
  • Credit bureaus don’t make mistakes: Nearly eight in 10 credit reports contain a serious error or some sort of mistake, according to a survey by the U.S. Public Interest Research Groups. Because many errors can negatively impact your credit score, it’s important to check your credit report regularly and dispute any inaccuracies you find.
  • If a bill or debt isn’t generally reported to the credit bureaus, missing a payment won’t affect your credit score: Any time you pay a bill late or don’t pay at all, that activity can be reported to the credit bureaus. Different companies have different policies about reporting late payments, but never assume that just because you’ve never seen a particular bill listed on your credit report that it can’t negatively impact your credit score if you don’t pay it.
  • Your credit score only impacts your ability to get credit or a loan: False. Employers, insurance companies and rental or leasing agencies all check this number. Your credit score can prevent you from getting a job or the apartment you want. In addition, people with bad credit scores pay more for insurance premiums than those with good credit scores.
  • Having a variety of debt impacts your credit score: This one is true. Auto loans, credit cards, mortgages, and student loans all impact your credit score. In fact, the more variety of debt, the more responsible you appear to lenders (so long as you’re responsible with this debt).

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Credit Karma enables consumers to put their credit to work for their overall financial health. Credit Karma’s goal is to help its more than 1 million users realize the everyday cost savings of having a good credit score by providing a range of tools and resources to help consumers improve their financial situation.


{ 10 comments… read them below or add one }

1 Kevin May 27, 2010 at 8:22 am

The part about if you miss a payment they’ll report it, but if you pay on time they won’t report it never made sense to me. That doesn’t really give a fair picture of your payment history. I really can’t believe how one number can affect your life.
I read that the new financial reform bill is supposed to be keeping employers from being able to look at your credit. Hopefully that part passes so the credit bureaus don’t control your life as much.

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2 T.V. May 27, 2010 at 9:25 am

Great post! Helpful and straightforward.

Quick Question:
I use my credit cards a lot, but I pay in full before my statement is even out (via online banking). Does paying my “bill” before any bill is due negatively affect my credit? For example if I charge $1000 from April 1 to May 1 and the bill isn’t due until June 1; Does paying it on April 30th have the same effect as paying it in May? Do the credit agencies see this as not using my credit? I am essentially making my credit card a debit card.

I would not be required to pay interest as long as I pay in May, right?

I still want to pay my bill in full every month, but I want to make sure I’m gaining “credit-ability”.

Thanks in advance

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3 Bern May 27, 2010 at 9:39 am

T.V., I’ll add my two cents. It’s great that you pay off your credit card every month. But, this will not improve your credit score.

Think of it like this. Whenever your credit score is pulled, it is like a snapshot in time. They don’t know if you pay off your credit cards every month. The look at what you are doing at that point in time.

This is why I tell people to utilize only 30% of their credit limit. If you are maxed out on your card and your credit is pulled, you will look high risk. It doesn’t matter that you pay off every month. What matters is what you are doing when they pull it.

To do this, as scary as it may sound, I would increase your credit limit as high as you can (this can also act as an emergency fund). Keep your charging under 30%. This will increase and maintain a good credit score.

Best of luck!

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4 Everyday Tips May 27, 2010 at 9:58 am

I am now motivated to check my credit score again, it has been awhile.

In the case of your credit score, I think not all debt is bad debt. As you said, as long as you are responsible, having some credit cards/loans, etc may help your score. However, just pay that balance every month, so it really isn’t ‘debt’.

Did that make any sense?? :)

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5 Impulse Magazine May 27, 2010 at 10:20 am

I think most people think that they should have good credit just because they pay all of their bills on time

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6 Favor May 27, 2010 at 3:11 pm

Great post indeed!!! :)

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7 Devon White May 28, 2010 at 8:39 am

Credit scores aren’t about your ability to repay debt. They are all how profitable a target you are for credit products.

Credit scores basically project how likely you are to carry a balance over a long term and pay lots of interest charges without defaulting on the creditor.

That’s why a person earning 40k a year and carrying 6k of revolving debt, but making payments every month will have a much better score than someone who earns 150k a year, carries no debt and pays off their balance every month.

They are making money off the first person. They aren’t off the second one. So they give the first person a nice high score because they are the perfect “target” to suck money out of.

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8 usario clave May 28, 2010 at 6:56 pm

Devon White is incorrect on two counts.

Your credit score is a reflection of how you manage your debt, not how profitable you are.
In addition, credit card companies make money from both people who pay in full (they get a percentage of the transaction) and from people who carry a balance. The 150k earner who charges $5k/month and pays in full is a low-risk 3% return. The 40k revolver is an 18% high-risk return.

In this day and age, they’d much prefer the former than the latter.

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9 J. Money May 31, 2010 at 12:53 pm

I actually gotta check out my score soon too…more out of curiosity than anything – wanna see if I’m still around 740 but afraid to jinx it ;)

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10 janey June 1, 2010 at 11:09 am

@devon: I am that exact first person, and my score has been the same for 3 years. Had no debt, but ended up with plenty of it thanks to a car payment and then a nice pile of medical bills a few months later.

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