12 Credit Facts That Can Help You Avoid Costly Mistakes

You affect your credit more often than you realize. Your score changes whenever you apply for a loan or shop with your credit card.

You can use this to your advantage if you understand how credit works.

But there’s a lot of confusion around this topic.

Below, we take on some common myths and explain essential credit facts to demystify the subject.

Myth 1: Checking Your Credit Report Will Lower Your Credit Score

Fact: Checking your own credit report has no impact on your credit score whatsoever.

In fact, it's a good idea to check your report periodically. You need to monitor it for errors and signs of identity theft or fraud.

Myth 2: Closing Unused Credit Cards Will Improve Your Score

Fact: Having old credit accounts without outstanding balances improves your score.

That’s one of the facts about credit that isn’t obvious at first glance. Let us explain.

Your credit utilization ratio is a key factor in your score. This is the amount of debt you have compared to the total amount of credit available to you.

To achieve a good score, you should keep it below 30%.

To maintain your debt levels low, you should always pay off your credit card in full. And if you keep your account open, you will increase the amount of credit you have available.

Closing unused cards will decrease your available credit. This will increase your credit utilization ratio and, in turn, negatively impact your score.

Myth 3: You Need to Have a Perfect Credit Score to Qualify for the Best Interest Rates

Fact: The facts show that a higher credit score increases your chances of getting a better interest rate. Still, you don't need a perfect score to qualify for a loan.

Creditors don’t make lending decisions based only on your credit score. They also consider factors like your employment history and streams of income.

So, even if you don’t have a top credit score, you can still get a loan. And if the terms don’t satisfy you, you can work on your score and try again in a few months.

Myth 4: You Have One Universal Credit Score

Fact: You likely have several different credit scores, depending on the credit bureau and the scoring model used.

Your score may vary depending on the factual data on your credit report. Each reporting agency has slightly different information about your history.

What’s more, there are different types of credit scores. While most lenders use FICO scores, some might check your VantageScore.

Myth 5: You Can Get Blacklisted if You Have a Negative Credit History

Fact: There is no credit "blacklist" in the US.

While not all other countries have credit scores, some do have a list of people who are ineligible for credit.

In the US, there's no such thing as a blacklist. That said, a negative history can still make it difficult to get approved for credit.

Myth 6: Credit Bureaus Determine Your Creditworthiness

Fact: Lenders determine whether you get a credit or not. Credit bureaus only collect information about your credit history.

It’s hard to get your facts straight with all those terms about credit.

But this is what happens when you apply for credit:

Your application triggers a hard inquiry. The lender checks your report and score and decides whether to let you borrow money.

Myth 7: Your Relationship Status Affects Your Credit Score

Fact: Credit bureaus don't collect data about your relationship status, age, race, or other demographic factors.

The only facts that impact your credit score are credit-related.

This includes your payment history, credit mix, new inquiries, the amount you owe, and the length of your credit history.

That said, if you have a joint account with your spouse, for example, any activity on it will show on both of your reports.

Myth 8: Negative Information Stays on Your Report Forever

Fact: Most of the information stays on your report for seven years.

Hard inquiries remain in your history for two years. They only affect your score for one, though. Bankruptcies and closed accounts could stay up to 10 years.

That said, the impact of negative facts on your credit history decreases over time.

Myth 9: Checking Your Credit Report and Score Costs Money

Fact: You can check your credit score and report for free.

There are a number of websites and apps that offer free credit scores.

Additionally, you're entitled to a free credit report from each bureau once every 12 months. You can get your reports from AnnualCreditReport.com.

Myth 10: Credit Scores Are the Only Factor Affecting Lenders’ Decision

Fact: Creditors also consider your employment history and different income streams.

Your credit score information is important when you want to borrow money. But the lender might also look at your income and employment details to decide if they should give you credit.

You can also use property in your name as collateral. These so-called secured loans are less risky for the lender, so they offer lower interest.

Myth 11: All Bill Payments Go Into Your Credit Report

Fact: Utility and phone bills paid on time don't go into your report.

Although your payment history has the biggest impact on your credit score, utility and phone bills paid on time don't go into your report.

These companies do not report to the credit bureaus. So, even if you have a great track record of paying these bills on time, it won't impact your score.

If you fail to pay your bills, though, the company might transfer your debt to a collection agency.

In that case, the information about the collections account will remain in your report for up to seven years.

Myth 12: Everyone Has a Credit Score

Fact: You need credit history to get a score.

Not everyone has a credit score. If you don't have a credit history, then you won't have a credit score.

To start building your credit, you can get a secured credit card or become an authorized user on someone else's account.

Once you have a few months of credit history, the scoring models will generate a number based on your repayment history, outstanding debt, credit utilization, and other factors.

Wrap Up

Knowing how to distinguish the credit facts from the myths can help you avoid costly mistakes and make better financial decisions.

Keep these in mind next time you're considering a major purchase or a loan application.