There are 5 factors that makeup FICO® Scores: Payment History, Amount Owed, Length of Credit History, Credit Mix and New Credit. With all of these components included in one score, it’s no wonder that facts can sometimes be “distorted” and myths created.
There are 5 very common falsehoods about credit scores that we wanted to clear up, and they start with…
Don’t Use Credit Cards and Your Score Will Improve
Actually, not using credit cards might hurt your score in a number of ways. As mentioned above, part of your FICO® Score is based on your Credit Mix (10% to be exact). That means, having different types of credit accounts, including credit cards, can help increase your score. Amounts Owed also makes up your score (30%) which includes the percentage of available credit you’re using. Having an open revolving credit line with a low balance in your credit report can help raise your score.
Closing an Unused Credit Card Account Increases Your Credit Score
Related to myth number one is the thought that closing a credit card account will increase your score because you are showing you can pay your bills without relying on credit.
However, closing a credit card account may affect your credit utilization ratio (the amount of credit you’re using compared to how much available credit you have). If you currently have outstanding credit and then close a credit card account, you’ll be using more credit with less available credit – which will increase your credit utilization ratio and can lower your score.
That might sound confusing. If it does, please read it again very slowly. You can also read more about your credit utilization ratio to help things make a little more sense.
To Build Credit, You Need to Carry a Balance
This couldn’t be further from the truth. Plus, if you do more research on the subject, you’ll see the falsehood could end up costing you money. As a matter of fact, the longer you carry a balance, the more likely it is that compound interest can cause debt.
Think of it this way, every month each of your lenders reports your payment history to one or all of the major credit agencies. If the report shows you pay on time, it positively impacts your credit score. Whether you carry a balance month to month is not considered by the credit score.
Checking your own credit will hurt your score
First things first: A “hard” inquiry is when you’re applying for credit, and the lender pulls your credit file to help them make their lending decision. A “soft” inquiry includes those credit checks that you didn’t initiate, like those created when a company screens your credit to send you a promotional offer.
Hard inquiries are factored into your credit score and can lower it if there are too many of them. Soft inquiries are not included when computing your credit score and don’t affect it in any way.
A Higher Income Means a Higher Credit Score Nope. Not true at all. Your income is not considered in your credit score. Take a quick look above at the 5 factors that affect your score, and you’ll see that income is not one of those factors. Whether you earn $20,000 or $200,000 a year, it’s only those 5 factors that will determine your FICO® Scores. It’s also important to note that age, race, religion, gender, marital status or any other non-debt related factors are not considered in your credit score.
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