I never realized how much people didn’t know about credit and credit scores. I’m not saying that everyone is lacking the knowledge around credit, but the topic is something I pay close attention to. Why? My credit report and score provides me opportunities that I would otherwise not be granted. Having a clean report and high score is essential in today’s world.
In a recent survey conducted by TransUnion, it was revealed that many consumers have no idea how their scores are calculated and what’s included in their credit report. I find that a little scary, especially since there are a number of ways to get your credit score for free! It’s not just people who have never seen their report, but also those who regularly check their reports and scores. In conjunction with TransUnion*, we are going to bust some credit myths and throw down some facts for you!
Notable Survey Results
Before we get to the credit myths and our attempt to bust them, I wanted to go over a few things that stood out to me in the survey. Many of these surprised me, but after realizing the lack of information around credit, I understood a little more.
The biggest result that took me by surprise was that 48% of the survey respondents thought that an increase in income also increased their score. That’s quite a lot of people thinking that if they made more money, their score would be better, however this is simply not true.
The other notable result was that 61% of respondents thought that after paying off debts from late payments, their score would automatically increase. Unfortunately, that’s not true. While paying off those debts is a good thing and it can increase your score over time, you have to prove yourself and how you handle your finances. Your score won’t just jump up a lot after you pay off your overdue debts. That scar can be on your report for up to seven years.
* TransUnion has provided me with compensation for my time and efforts on this article. As always, all opinions are 100% my own and not affected by any compensation, ever.
6 Credit Myths Busted!
In an effort to go all Mythbusters on you, let’s get down to business. Credit can be a tricky world. There are multiple reporting agencies, multiple reports, and even more scores. It can be so confusing, but it doesn’t have to be that way. Remember this, if you have solid finances, pay off your debts on time, and don’t default, then you should have a pretty good report and score. This is all dependent on if you actually use credit!
To help you out even more, there’s even an infographic below created by TransUnion to visualize the myths.
Credit Myth #1
The Myth – Checking your credit score will drop it.
The Fact – Viewing your credit score only counts as a “soft inquiry” and doesn’t affect your score. It’s only when a bank, lender, or anyone else checking your report uses a “hard inquiry” that your score can be affected.
Credit Myth #2
The Myth – You should close old or inactive accounts to help your credit score.
The Fact – This will probably do the opposite. One credit score factor is the length of your credit history. If closing an account will shorten that length, then your score can be affected.
Credit Myth #3
The Myth – Paying off a negative record means it’s removed from your credit report.
The Fact – You should always focus on paying off negative records, but they are not generally removed immediately. In fact, they can stay on your report for up to seven years.
Credit Myth #4
The Myth – Co-signing doesn’t mean your responsible for the account.
The Fact – Wrong! When you co-sign a loan or joint account, you are as responsible as the main borrower/account holder. If they don’t pay for the loan, then you will be responsible for it. Both are also affected by the status of the account. Loans and accounts are reported on both credit reports.
Credit Myth #5
The Myth – Paying your utilities, rent, and cell service on time will help your credit score.
The Fact – If you don’t pay your rent, utilities, and cell phone bill, you can be sent to collections. This can negatively affect your score. Unfortunately, there are very few companies that report your on-time payments to the credit bureaus.
Credit Myth #6
The Myth – Your credit score reflects recent changes or trends in your payment behavior
The Fact – Credit reports and scores tend to be a moment-in-time glimpse of your consumer risk. This means they typically don’t show you your overall trend. TransUnion did just release a new product called CreditVision®, which is a scoring model that incorporates an expanded view of payment data and up to 30 months of loan amount history.
The fact versus fiction is very informative. I didn’t know that even though I pay off negative records, my bad record would not generally be removed immediately. Seven years? That is too long. Thanks Gray!
Really great post, Grayson! I have heard that closing out old/inactive accounts is a smart idea, but I had no idea that it actually has the opposite effect. I’m going to leave mine open now. I know several people that thought by co-signing a loan, they were not responsible for the account…so not true. Really appreciate the advice.
Thanks for commenting Valerie. It’s generally not a good idea to close out old accounts. The length of your credit history makes up a good chunk of your score.
Wow, this was actually really helpful. Before I got more involved with finance I think I believed in each of these myths at one point in time, especially the one about how paying bills on time would help my score. Great post!