Think you understand your credit report? Find out how many of these myths you believe.
Your credit report is among your most important financial records. Its details reveal to a potential lender how risky you are as a borrower, and therefore how likely they’ll approve you for any type of credit.
Many aspects of your credit report are cut-and-dried — like the number of open credit accounts you carry and any past delinquencies. But it might be hard to understand everything that’s in it.
We break down a handful of persistent misconceptions many people have about credit reports to help you pave a strong path to financial health.
Myth No. 1: Partial payments will appear as “on time” repayments on cards and loans.
Not all credit accounts are repaid in the same way. For instance, short-term loans can require multiple payments a month, while personal loans generally require you to pay a specific amount to remain in good standing.
On your credit report, your payment history includes how many days your payments are overdue — 30, 60, 90, 120, 150 and 180 days. If you don’t make a minimum payment, make only a partial payment or miss a payment altogether, it’s considered overdue.
While one overdue payment may not tip you into bad credit, too many will damage your credit score. And lenders will see them as a red flag to borrowing.
Myth No. 2: Paying your utility bill on time improves your credit score.
Not all utility providers report your repayments to the credit reporting agencies. This includes electricity, water and gas providers, as well as your phone or Internet.
Myth No. 3: Paying your electricity bill late will not affect your credit score.
While utility providers generally don’t report ongoing payments, they can list late payments, charge-offs or whether they’ve sent your debt to collections. So while you generally won’t improve your score by paying these types of bills, you can damage it by failing to pay or making late payments.
Myth No. 4: Paying old debts erases them from your credit report.
Even if you get around to paying off debts that are chronically late or, worse, sent to collections, they typically stay on your credit report for a set time. Most black marks stay on your credit file for seven years, however, bankruptcy can linger for 10 years.
Unfortunately, only time can clear negative marks.
Myth No. 5: Shopping around for credit doesn’t affect my credit score.
Every application you make for credit is listed on your credit report and affects your credit reputation. The more you apply within a short time, the more potential lenders will see you as somebody who’s desperate for credit.
Space out your applications for credit, and only apply if you’re sure you want the account and can qualify.
Don’t worry about checking your personal credit report: You can’t damage your score by checking in on your own well-being.
Myth No. 6: Your credit score is listed on your credit report.
When you order your free annual credit report, you won’t find your credit score — you typically have to pay a fee for that. However, if you’re denied a loan or receive unfavorable interest rates due to your credit score, the lender will likely provide you with the score it used to assess your creditworthiness.
Myth No. 7: When you get married, your credit scores are joined at the hip.
Credit scores and reports reflect the financial history of an individual. However, if you cosign for a financial product, have a joint credit account or reside in a community property state, these types of credit accounts are shown on both of your credit reports.
Keep in mind that in a divorce, you’re both responsible for any joint credit accounts.
Myth No. 8: As long as your bills are paid, you don’t have to check your credit report.
By not checking your credit at least annually, you run the risk of mistakes sitting on your credit report unknowingly. Worst case, you could miss out on seeing someone else assuming your identity.
Sure, paying your debts on times is a good practice. But you’ll want to actively keep tabs on your credit report to know that your credit history information is correct.
Myth No. 9: All debts are created equal.
Auto loans, student loans and mortgages typically account for the larger amount of debt that consumers take on — so having $300,000 in debt due to a combination of any of these three is common.
On the other hand, if you take out a personal loan or are approved for a credit card with a high limit and spend it all on nights of partying or living above your means, that’s an irresponsible use of credit that’ll likely result in a financial headache that could severely damage your credit score.
Myth No. 10: Closing an inactive credit account can bump up your score.
Your score can actually drop a few points after you close an inactive credit account. If it’s one of your oldest accounts, you’re significantly cutting down the length of your credit history, which accounts for 10% of your credit score. On top of that, by reducing the amount of credit you have available, your credit utilization ratio shoots up.
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Educate yourself about credit reports and scores so you can know what is what when it comes to your creditworthiness. A few other fallacies floating around out there when it comes to your credit report are:
- Your credit score is a reflection of you as a person
- People with good jobs have good credit scores
- You only have one credit score
- Credit scores factor in demographic information like race, ethnicity, gender, age, education and so on
All of the above are false. So the next time you overhear a little nugget of information about credit scores out in public, take it with a grain of salt because it may not be accurate.