We're all aware of the importance of having great credit scores, but sometimes figuring out how to get that stellar credit score is like cracking the code to the secret sauce at your favorite burger joint. The result is that over the years, dozens of credit scoring myths and misunderstandings have popped up as people have attempted to get their financial lives in order. Here are my top five in descending order.
Top Five Myths About FICO Scores
5. "Canceling credit cards will improve my credit score." FICO is all about your past - 15 percent of your score includes the age of your oldest account, along with the average age of your credit accounts. Closing down old accounts essentially wipes out all of the hard work you've done to establish a long, trusting relationship with a lender. Even more, closing old credit cards can cripple your credit utilization ratio, which is 30 percent of your overall score. If you throw away available credit that has been offered to you, your utilization rate will rise and lenders may think you're too strapped for new credit. You want to keep that utilization rate at least below 30 percent.
4. "There is only one credit score that matters." I can't begin to tell you how often people are surprised that they have three separate FICO credit scores. A lender can pull from any or all of the different bureaus (Experian, Equifax, and TransUnion), and each of the bureaus will have varying information. As it is hard to ever know which bureau your lender may use, you should check and build your credit score with each major credit reporting agency.
3. "I never miss a payment, so I don't need to check my credit score." Just because you have never missed a payment does not mean your credit is spotless. Having cards closed from inactivity, high balances, or fraud can destroy your credit. Everybody, and I mean everybody, should check their scores at least once a year. If you want to be more proactive, there are some fantastic identity theft services that can help you keep an even closer eye on your scores.
2. "My credit score is beyond repair." No credit score is beyond repair! I have watched with my own two eyes as clients have taken their credit scores from the low 400s to the low 700s. The increase slows as the score gets higher, but the ability to improve your score, regardless of what it may be now, is undeniable. That's the beauty of it.
1. "I don't need to worry about credit." This is arguably the most common myth that persists in the world today, and it is simply wrong. In today's world, the only ways you can possibly get away with not worrying about your credit is if you're so wealthy you never need to rely on credit or you're over 80 years old! Other than that, each time you apply for work, a new place to live, or for any type of financial product, your credit will be evaluated. If your score isn't above 700, things may be tough for you. On top of that, finances are known as one of the most stressful points in a person's life, and your credit score directly affects your financial profile. As you work on building your credit scores, don't be afraid to ask questions! These are some of the most important personal financial decisions you can be making, so you don't want to get hung up in the process by any other myths. And trust me, there are unfortunately a lot floating around out there.
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