12 Credit score myths debunked

Elizabeth Barry 24 May 2016

Ever wondered what was going on with your credit report? Here’s a list of the common misconceptions some people have had about theirs.

The idea of having  a personal credit history that tracks our spending and borrowing activity is not new. The fact that credit reporting agencies observe and keep tabs on us might have been slightly disturbing at first, but we’ve gotten used to that too. Yet the mechanics of credit reporting and credit scoring still remain shrouded in mystery. Here are some things you might have thought were true about your credit score that really aren’t.

Myth 1: I’ve just got a substantial pay increase and this will boost my credit score.

Truth: Income does not factor into your credit report at all. Whether you’re making a six-figure salary or way less, your credit score only takes into account your history of borrowing and repaying. However, when you apply for a new credit card, your lender will look at your income (as well as your credit report), to determine your ability to make repayments.

Myth 2: Having a fat bank balance means I have a good credit score.

Truth: Since assets like bank balances aren’t listed on your credit report, they do not affect your credit score. That said, some lenders may still ask for your bank statements when reviewing your credit card or loan application because this can also factor into their consideration along with your credit score. To actually help your credit score, you can use some of that money in your savings account to pay down existing debts and prove that you’re a responsible borrower.

Myth 3: My credit report will tell me my credit score.

Truth: Your credit report and credit score are different things. Firstly, your credit report is the file which contains historical information about your borrowing and repayment behaviour.

Your credit score, on the other hand, is a number derived using that information. In fact, there are so many methods of calculating a credit score that very few lenders would arrive at the same credit score for you even if they based their calculations on the exact same credit report. So, no, your credit report does not contain your credit score. If the credit reporting body (CRB) offers to tell you your credit score for a fee, that score is merely their opinion of your credit report and would most likely be different from your lender’s.

Myth 4: All the agencies report the same credit score for me.

Truth: As there are numerous credit scoring models in use, it’s possible that all three credit bureaus would give you a different credit score even if they have the same information on file about you. This leads us to another flaw in the system: as reporting is voluntary, lenders are not obliged to report an incident to all three CRBs, which means that your credit report at the three bureaus may not even look the same.

Myth 5: Having no debts means a good credit score.

Truth: A credit report is essentially a way for lenders to determine whether you’re a responsible borrower. A completely blank credit report only tells lenders that you haven’t borrowed any money in recent years, and this gives them little or no assurance that you are a good loan candidate. What they want to see is a good credit history, such as healthy debt and regular, punctual repayments.

Myth 6: I can improve my credit score by using debit cards and prepaid credit cards.

Truth: Debit card and prepaid card activity does not even make an appearance on the credit report, so using them is synonymous with using cash. The end result is the same: your credit report will draw a literal blank.

Myth 7: It doesn’t matter if I max out my credit cards because I always repay them on time.

Truth: Even though lenders may disagree on how to calculate a credit score, most of them can agree on how the debt/credit utilisation ratio is calculated. Simplified, this is the total amount of debt you’ve incurred divided by the total amount of credit available to you. For example, let’s say you have two credit cards with a $5,000 credit limit on each of them. Your balance is $2,000 on one card and $3,000 on the other. Your credit utilisation ratio will be ($2,000+$3,000)/($5,000+$5,000) = 50%. Since it’s commonly agreed that 30% is a healthy ratio, 50% would be undesirable, and maxing out your cards is a definite no-no.

Myth 8: My credit score won’t be affected if I close one or two of my credit card accounts.

Truth: Continuing with the example above, if you decide to cancel your credit card with the $2,000 balance, your credit utilisation ratio would then become $3,000/$5,000 = 60%. If on the other hand, you decide to close the other account, your credit utilisation would improve to $2,000/$5,000 = 40%. It might be wise to cancel a credit card with high annual fees or one  that you haven’t used for a while, but do consider the effect it will have on your utilisation ratio.

Myth 9: I’ve already paid off my credit default so it shouldn’t affect my credit score anymore.

Truth: Unfortunately, overdue accounts listed as payment defaults and clearouts stay on your credit report for five years, while overdue accounts listed as serious credit infringements are listed for seven years. If you need to apply for a loan within that period of time, take comfort in knowing that the lender will also be able to see that you’ve paid off the default.

Myth 10: Requesting my own credit report can hurt my credit score.

Truth: Credit inquiries fall into two categories: hard and soft. The former takes place when a lender requests your credit report to assess your creditworthiness; the latter happens when you make an inquiry into your own credit report. Hard inquiries have a slightly negative impact on your credit score, but soft ones don’t. In fact, checking your own credit report can be a good practice since it gives you a chance to correct any mistakes the reporting bodies might have made.

Myth 11: It will look better on my credit report if I consolidate all my credit card debts on one credit card.

Truth: An exercise in debt consolidation will not affect your credit score at all if you don’t pay off any part of the total balance or close any accounts. This is because moving debt around doesn’t change your debt utilisation ratio, which is the important thing to consider in this scenario.

Myth 12: A good credit repair company can help remove the black marks on my credit report.

Truth: While credit repair companies can help you challenge a credit lender’s unlawful behaviour in regards to a negative listing on your credit report, they cannot remove a black mark that rightfully belongs there. What they will attempt to do is find a loophole where the lender has made an error in the listing and challenge its veracity. Keep this in mind and consider the fees you’ll incur when hiring credit repair professionals.

With a solid understanding of your credit report and credit score, you’re now ready to make those important decisions about your finances. It’s always good to improve your credit history when you can, since you never know when you might want to take out a loan. You can get started now by ordering a copy of your credit report online now!

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