Your credit history report shows where you’ve applied for credit, who extended you credit and whether you’ve paid as agreed. The report represents a snapshot of your credit health. However, a record of these behaviors stays on your credit report for 7 – 10 years. A change in credit behavior can mean improved financial health or can serve to put a stop to the progress you’ve made towards reaching your financial goals.
Believing and acting on credit myths can result in:
- higher interest rates or fees on home and car loans;
- a higher annual percentage rate (APR) on credit cards;
- approval on less than favorable types of mortgages or straight denials; and
- a decreased ability to save money since most of your spending plan is used to pay high-interest credit accounts.
Lenders and creditors extend their best offers to consumers with good or excellent credit so dispelling myths by gaining a proper understanding of credit can improve your financial well-being.
Reports vs. Scores – What’s the Difference?
Credit history reports and credit scores are both used to summarize how well you’ve handled credit over the years. These terms are often used interchangeably since they serve a similar purpose – to assist a potential lender in determining the risk of extending new credit. A credit score is a three-digit representation of your credit report. In general, the higher your credit score, the better your credit. You can have a credit report without a credit score, but you can’t have a credit score without a credit report.
Now let’s uncover the truth about credit so you can improve your financial health and make smart money choices going forward.
Myth: You have only one credit score.
Credit scores vary by credit bureau, credit scoring agency, and scoring model. FICO® and VantageScore are two commonly used credit scoring companies that lenders, creditors, and even landlords use to decide if they want to do business with you. Depending on the scoring version used, your score will vary. Regardless of which version is used, higher scores mean generally lower risk for potential creditors.
Myth: Checking your credit score hurts your credit.
This popular myth fools even the most credit smart individuals. Pull your credit at least annually to review it for accuracy. So, why would you be penalized for acting responsibly? You’re not.
In fact, there are two types of “credit pull” inquiries: 1) a soft pull and 2) a hard pull. A soft pull occurs when you pull your credit or when a creditor accesses your credit before issuing a prequalification offer. Soft credit pulls do not impact your credit - hard credit pulls do.
Hard credit pulls occur when you apply for a new line of credit, request a credit line increase and even when it’s pulled by another authorized third party. For example, you might permit a utility company, cell phone service provider, or landlord to access your credit report or credit score as a condition of contracting for services. Each provider wants to have an assurance that you’ll pay your bills as agreed and your credit score is one indicator of your likelihood of doing so.
Check your credit history report at least annually for accuracy. You’re entitled to a free report from each major credit reporting bureau under the Fair Credit Reporting Act. Request your copies from AnnualCreditReport.com.
Myth: Credit reports only contain your history of credit use.
Credit reports contain more than your credit activity, name, and current address. They also include other names you may have used to apply for credit (including maiden names), recent addresses, your social security number and date of birth as well as the names of current and previous employers. Be sure to check your credit report at least annually to ensure that the information contained in your report belongs to you. It’s possible for credit activity for someone with a similar name or Social Security Number (SSN) to appear on your credit report.
Myth: Only credit cards and loans appear on your credit report.
Public records such as bankruptcies and lawsuit judgments can appear on your report for up to 10 years. Collection accounts remain for at least seven years. Pay your bills on time to prevent your financial goals from losing traction.
Myth: Credit scores are THE deciding factor in credit decisions.
With so much focus on the importance of credit, it’s easy to forget that other factors influence credit approvals. Household income and length of employment are two other factors that can weigh heavily in credit decisions. Having a perfect credit score does not guarantee credit approval. The reverse is also true. A low credit score alone doesn’t ensure denial.
Disposable income and employment stability, along with the underwriting policies of the creditor, all factor into credit decisions. A larger financial picture of employment instability can cause a credit denial or require a cosigner in order to obtain credit approval.
Not knowing the facts can lead to credit moves that do more harm than good. Use this information to remove barriers you might encounter on the way to achieving your financial goals. Already taken a financial misstep due to a popular credit myth? Don’t worry. You can recover. Get back on track quickly, and you can still achieve your financial dreams.