Common Credit Score Misconceptions

by Krantcents · 27 comments

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Want to start your year with a good credit score? That is an excellent idea! While you are sorting out your finances, try to start a savings plan for the future by putting money away into an ISA account. One of the main perks of an ISA account is its tax benefits.

A FICO credit score is normally between 300 and 850 points. The higher the score, the better your credit rating will be and the lower the interest rate you will pay on a loan.

Many people have some misconceptions about their credit scores:

1. When you have paid off a large debt, it is a splendid idea to close your credit card as soon as possible thereafter.

Wrong! By closing your credit card, you are likely to increase your “debt-to-credit utilization ratio”. This is the total amount of your credit card debt divided by the total of all the limits on your credit cards.

The higher the utilization, the higher the risk, as seen through the eyes of the credit score calculator guys. If you use 10% or less of your available credit, you have the best chance at a high score.

To earn the highest score, use no more than 10% of all your available credit. Manage your money well by investing in an ISA savings account.

2. Your employment history has an influence on your score. If you believe that having a job improves your credit score, you cannot be more wrong.

3. Financing a big purchase will lower your score. Wrong again! A new loan on a house or car will not affect your credit score. What will help improve your score is having a number of loans and credit cards and managing them well.

Listen to this; about 10% of your FICO score depends on the kinds of credit you use. Start a back up plan for hard times by putting money away in an ISA account. An ISA account is one of the best investments you could make.

4. Your score is higher if you are older. False! You will have a longer credit history as you grow older, but your age on its own does not impact the score.

Here is good advice; start building a credit history as early in your life as possible and manage it as well as you can. When you have a history of debt and paying your outstanding amounts in full and on time, your credit score will improve.

5. Do you believe that if you keep on checking your score, the mere fact that you watch it will lower your score? Nothing could be further from the truth. It is, however, a good thing if you keep an eye on it to see that it stays in a good range. Check out the credit reporting agencies, Experian, TransUnion and Equifax to see where you stand.

The more financial institutions that are checking you out, the harder it is for your score. If, on the other hand, you are planning to buy a car or a house and you are applying for a mortgage or car loan, you can expect the lenders to go and check your score. This will, however, not affect your rating and they will all be bundled together in one inquiry.

Use your credit wisely, plan your finances and save for your old age with money you save in your ISA savings account. Although your ISA account will not affect your credit score directly, it will help you be financially more stable.

Photo by:  Vectorportal

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{ 23 comments }

DollarDisciple January 21, 2012 at 10:12 am

It’s also very important to maintain the credit accounts you already have. 

I got a letter from my first bank saying that if i didn’t use my card they would close it. I hadn’t used the card in a long time but it was my oldest credit account. Sure enough: they closed it and my credit score dropped. 

krantcents January 21, 2012 at 11:12 am

Good point! Maintaining credit accounts sometimes means using it just to maintain it.

20sFinances January 21, 2012 at 11:39 am

Yes, I am amazed at how many people think that they should close their credit card accounts. I will most likely keep my current ones active as long as possible (and not need to open any new ones). I will have a huge benefit of credit history and length of account in many years because I started young.

krantcents January 21, 2012 at 12:15 pm

It is different if you have a long credit history and you consciously understand the impact. It is usually young people with a short credit history that do not understand the impact.

Bike Lane Living January 21, 2012 at 12:09 pm

There’s a lot of misinformation flying around. Thanks for clearing things up KC.

krantcents January 21, 2012 at 12:16 pm

You’re welcome. You generally accept information from authorities, but you should ask questions anyway.

My University Money January 21, 2012 at 2:50 pm

This is why I consistently go against the grain and recommend that students should have access to credit cards (perhaps even two of them) and to use them often.  Even better if they get cool rewards on them.  The catch of course is that they should ALWAYS pay off the full balance, or at the very least have immediate plans to pay the balance quickly.  The resulting credit score will save huge amounts of money on their first vehicle and house purchases amongst other things.

krantcents January 21, 2012 at 5:07 pm

I agree with you. Learning how to use credit cards responsibly is very important. Children need to learn how to use them responsibly before they get them. If the people (including their parents) around them act financially responsibly, it is most likely they will too.

MyMoneyDesign January 21, 2012 at 5:59 pm

Thanks for clearing these up.  I never understand No. 1.  It just seems irresponsible to have multiple, unused credit cards open.  Closing them would be the right thing to do.  I wish they’d change that aspect of the score.

krantcents January 22, 2012 at 9:42 am

From their perspective, the credit card user should build up a history of responsible behavior and demonstrating that takes time. If you close accounts you do not use, you are removing history that affects your score.

Barbara Friedberg January 21, 2012 at 8:36 pm

This was helpful information. There is quite a bit of mystery surrounding credit scores. Yet, they are so important.

krantcents January 22, 2012 at 9:43 am

I always believed, if you handle your credit responsibly, the score will take care of itself. This article clears up some misconceptions.

John@moneyprinciple January 22, 2012 at 9:17 am

From statistician colleagues who have worked in the credit scoring industry, if you have a mortgage and have serviced it steadily plus some loans and credit cards that are handled well,  never missing payments etc you will get a high score. 

It really is a crude as that. 

It does raise the question of what a credit score really means – some people who are so risk averse that they never take loans etc will find it difficult to secure finance should they need it. 

You have to play the game here!  Take a loan and pay it off more quickly to keep the interest down so make sure when you take it off that there are no penalties for paying it off early.

krantcents January 22, 2012 at 10:47 am

If you handle your financial responsibility well, your credit score will take care of itself. It worked for me.

World of Finance January 22, 2012 at 10:19 am

It’s true that many people overlook the importance of the utilization ratio.

krantcents January 22, 2012 at 10:24 am

It is part of your credit history to use it and repay it on time.

Darwin's Money January 22, 2012 at 3:06 pm

Thanks for sharing these common misconceptions; it’s a bit of a black box, but there are some myths out there which we KNOW aren’t true.

krantcents January 22, 2012 at 4:49 pm

The bottom line is use your credit wisely and your score will take care of itself.

CultOfMoney .Com January 22, 2012 at 3:22 pm

Hi there, new blogger here.  Not all the credit pulls are the same.  There is a difference between the “soft” credit pull and the “hard” pull.  Also the main reason that multiple checks when you buy a house don’t do so much is that the mortgage company or broker can request that all credit checks over the next 30 days be treated as a single credit check event.

krantcents January 22, 2012 at 4:51 pm

Multiple inquiries will hurt if they are not related to a single purpose. For example, if you applied for multiple credit cards!

The Jenny Pincher January 23, 2012 at 9:27 am

#1 is an excellent point that many people do not know or understand. When I was a loan officer & auditing accounts, I saw one persons credit score drop from 750 to 520 in one year and the only thing we could determine was he closed several accounts which made his debt to available credit ratio completely out of line. It was really sad b/c he went from A credit rating down to D credit rating and he thought he was doing the right thing by closing the accounts!

krantcents January 23, 2012 at 4:11 pm

Understanding the rules is necessary to play the game. The lesson is cut the accounts with the shortest history or not at all.

krantcents January 23, 2012 at 4:22 pm

I always handled my finances responsibly and my credit score took care of itself

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