Six common credit score misconceptions

Six common credit score misconceptions

The world of credit and credit scoring is not without its myths. Here are a few I hear often while interacting with USAA members:

You must carry a balance to get the best credit score. Nope. To have a good score you must responsibly use credit, but that doesn’t mean you need to carry a balance. In fact, part of your score is based on the amount of credit you have available but aren’t using, so keep your credit card balances low. Zero is best, but aim for less than 20 percent of your total available credit limit. 

Closing old accounts will sink your score. A long credit history is important, but a closed account won’t just disappear from your record. It will reflect on your score for years to come. On the other hand, closing an account, old or new, could immediately hurt your all-important utilization ratio (total debt divided by total available credit).

Checking your credit report is a downer. Actually, it’s a good thing. Get in the habit of keeping an eye on your credit report and score. Look for fraudulent activity and dispute errors. When you check your score, it’s considered a soft inquiry, similar to a background check. It won’t ding your score like applying for a loan or credit card will. 

More accounts mean a lower score. Not exactly. Applying for several lines of credit and loans within a short period can hurt your score, but using a mix of different types of loans is actually good for your rating. 

More income means more score. What you earn is not even part of the formula for determining a credit score. I’ve worked with plenty of people with lots of income and a poor grip on their debt. So while a better debt-to-income ratio may improve the chance you’ll get a loan, it’s not reflected in your credit score.

Your score is your score. You actually have a lot of scores, and it’s much more likely they’re different than the same.

 

J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.