There aren’t a lot of absolutes in this life. Death and taxes are usually the two things listed among life’s certainties. Well, I’m adding a third: Credit score confusion!
I hear from a lot of folks who have misconceptions about credit scores. Our credit score system is extremely complex and it’s not intuitive at all.
So let me assure you right now: It’s not you, it’s them.
Okay, now that you feel better about yourself, let’s clear up a few things about scores. Here are five of the most common myths that need to be busted. There are more, of course, but these can really get in the way of a healthy credit life.
Myth #1: A higher income results in a higher FICO score
Absolute Truth: Your income is not considered in credit score calculations.
A financially responsible person who makes $20,000 a year can have a higher FICO score than a highly-paid neurosurgeon who doesn’t pay bills on time. So don’t ever think your wages will hold you back from attaining a high score. If you use your cards responsibly, which means keeping a low balance and paying the bill in full and on time, you can build a great score.
Now, a low income can prevent you from being approved for certain credit cards. It can also result in a lower credit limit initially. But focus on having a high score and you’ll have plenty of credit card offers to consider.
Myth #2: My husband/wife/partner has great credit, so that means I do, too
Absolute Truth: You do not have a joint credit report or a combined FICO score.
Okay, this one has a lot of layers, so bear with me. As a couple, you don’t have a shared history that results in a single credit report. If you have joint accounts, you’ll see them listed on your individual credit reports.
Likewise, you have your own FICO score and your significant other has his or her own FICO score. But there are ways that the two of you can impact each other’s scores. For instance, if you have a joint credit card account, then it’s essential that you both handle credit responsibly.
If one of you gets sloppy with bill-paying activities and a late payment shows up on your credit reports, it can bring down both of your scores. The reverse is also true. If you are both on top of things, then your individual scores get stronger.
On the upside, two great FICO scores can help you when you apply for a mortgage or other loan together. So yes, you have the potential to be stronger together, but only if you’ve each built a great credit history.
Myth #3: A free score from a website is the same as a FICO score
Absolute Truth: No, the free scores provided by websites are not FICO scores.
Sometimes, I’ll get emails from folks who think they have a great FICO score, but sadly, I have to tell them that their score isn’t a FICO score. Websites who offer free credit scores pull your information from one or more of the major credit bureaus. The score you’ll see might be a version of VantageScore or some other type of credit score.
But I do think these educational scores can be very helpful, so they do have value. You’ll often get category “grades” along with advice on how to improve in certain areas. For example, if you get a “C” in payment history, then that’s the area you need to clean up.
But many credit card issuers are now showing your FICO score on your credit card statement each month. Some of these aren’t FICO scores, but they’re still helpful. If you aren’t sure what credit score you’re viewing, ask your issuer. And if you want a surefire way to check your FICO score for free, check out Creditscorecard.com. It’s a free website from Discover and you don’t even need to have one of their credit cards to use it.
About 90% of lenders use a version of the FICO score when considering applications for credit. So it’s a good idea to check it occasionally and see where you stand. You can also get a version of your FICO score by ordering it from myFICO.com.
Myth #4: You don’t need a credit score
Absolute Truth: A bad credit score can result in higher costs in other areas of your life. The total absence of a score (there’s no zero in FICO-world) makes you look a little risky to anyone viewing your credit report.
Life really isn’t fair. You’d think that not using credit would make you look totally responsible. Instead, it looks like you can’t get credit for whatever reason.
You also need to keep in mind that credit reports are sometimes viewed by folks who aren’t vetting you for a credit card or a mortgage. It’s becoming more common for employers to check the credit reports of job applicants.
Now, the credit report doesn’t show your credit score. But a score is calculated based on the contents of your report. If you have no score (or a bad score), then the details of the credit report will convey this to anyone checking your report.
Other reasons for having credit? Insurance companies look at specialized versions of credit scores when determining your premiums. Those with higher credit scores usually get lower premiums.
Also, if you need to rent an apartment, you’ll pay a higher security deposit for the apartment and to turn on the utilities. And yes, you can rent a car with a debit card, but a percentage of your funds will be held. By the way, it also helps to have good credit when you apply for a checking account so you can get a debit card.
And what if you want to buy a house? It’s very difficult to do so without getting a mortgage at a good rate. If you’ve amassed a large amount of cash that you can plunk down at the bank, then you’ll be fine. But for most people, that’s a tall order.
Myth #5: You have to carry a balance to build credit
Absolute truth: No, you don’t! You can build a great score without paying interest on your purchases.
This is the myth that does a lot of damage. Here’s the responsible—and cheap—way to use credit cards:
- Have a budgeted amount that will go on your credit card each month.
- Track your spending so you stay within your card’s budget.
- Don’t charge more than 30% of your available credit. Keep it below 10% if you want to boost your score quickly.
- Pay your bill in full every month and always by the due date.
Stick to this plan and you’ll be on your way to an excellent credit score. And don’t forget to pay all of your bills on time, not just credit cards. Your payment history makes up a whopping 35% of your FICO score, so do whatever you need to do to remind yourself when bills are due.
Read more: What makes up a good credit score?