Understanding your credit score is crucial, yet many people fall prey to outdated myths that can hinder their financial health. Here, we clarify some common misconceptions about credit scores, backed by data and expert advice, to help you manage your credit more effectively.
One prevalent myth is that checking your own credit report can lower your score. This is false. When you check your own credit score, it results in a "soft inquiry" which does not affect your credit score at all. In contrast, "hard inquiries," which occur when lenders check your credit score to evaluate your creditworthiness, can slightly lower your score. According to Experian, a hard inquiry might reduce your score by about five points. However, FICO's scoring system is designed to treat multiple inquiries related to auto, mortgage, or student loans as a single inquiry if they occur within a 14-day window, minimizing their impact on your score.
Another common misconception is that closing old and inactive accounts boosts your credit score. This advice is misleading. Closing old accounts can actually harm your credit score because it reduces your overall available credit and can shorten your credit history, which is a significant factor in credit scoring. The Consumer Financial Protection Bureau (CFPB) advises keeping older accounts open to lengthen your credit history, thereby potentially increasing your credit score.
It's also a myth that you need to check more than just your FICO score. While it's true that there are various credit scoring models, the FICO score is the one used by the majority of lenders. Each of the three major credit reporting bureaus—Experian, TransUnion, and Equifax—uses the FICO scoring model, though they may label it differently (Beacon, Empirica, and Experian/Fair, Isaac Risk Model, respectively). It's important to understand that differences in scores between bureaus can occur due to the non-uniform data each bureau may have. Therefore, it's advisable to check your credit reports from all three bureaus, especially before making significant financial decisions like applying for a mortgage.
Lastly, there's a myth that receiving credit counseling will hurt your credit score. This is not true. Modern FICO scoring models do not penalize consumers for seeking credit counseling. These services are designed to help individuals manage their debt more effectively and can be a proactive step towards improving financial health. However, the actions you take following counseling, such as negotiating lower payments or not following through on agreed payments, can affect your score.
To maintain or improve your credit score, consider the following actions:
By understanding and acting on these aspects, you can better manage your credit score and enhance your financial well-being. For more detailed information on credit scores and how they are calculated, visit the Consumer Financial Protection Bureau and Experian.
In conclusion, don't let common myths about credit scores misguide your financial decisions. Stay informed and proactive in managing your credit to maintain a healthy financial profile.
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