Common Misconceptions about Credit Scores

Many people correctly identify that their credit score is of importance when it comes to applying for loans and credit cards, rentals, employment and insurance. Yet studies show that the majority of people have only a vague idea of how their credit scores are compiled and understand little more than that paying late and exceeding credit limits is detrimental to their score. Common misconceptions about credit scores abound and erroneous myths perpetuate.

A common misconception about credit scores which influences how some people handle credit cards, is that a debt must be carried on a credit card to keep ones score high. Many mistakenly believe that they should carry a small balance over each month to maintain their credit, thus paying unnecessary interest. The fact is that clearing the monthly balance in full is the ideal use of credit, though carrying a balance isn’t detrimental to credit scores unless it exceeds 30% of available credit. Plenty of people who are misinformed and believe they must carry a balance can save the unnecessary interest costs they thus accrue.

Paying bills late is never good practice but a bill isn’t reported as late until 30 days past due in most instances. When a credit card company issues a charge for a late payment they are allowed to do this as soon as the bill becomes past due. Although a late payment may cost a hefty fee it isn’t recorded immediately.

It is a common misconception amongst those on low incomes that this will result in a low credit score. In fact income has nothing to do with credit scoring which is based on how one uses credit. Thus someone on a low income may well have the most excellent score if they pay all their bills on time, whilst the millionaire who pays late could have terrible credit.

A major misconception which the ING direct survey into consumer knowledge of credit scores identified was that closing old credit accounts is good. In actuality closing old accounts can have a detrimental affect on credit scores. It reduces the amount of available credit which could affect debt to credit ratios, and closes off accounts which represent the length of credit history.

It is becoming harder to identify a good credit score as there is more than one number available. Each of the three major credit bureaus issues its own credit score. The credit score most people identify with is their Fico score: however the Vantage credit score could also be the model used by a lender and this has a different scoring range to Fico. Vantage scores run from 501-990 against Fico’s 300-850. Thus someone could presume they have excellent credit if they score 730 on Vantage but in actual fact their Fico score would be far lower.

Another common misconception which many people have is that they will lower their credit score by accessing their credit reports and scores. It is only hard inquiries by others which can have any impact and there is no detrimental affect caused by checking ones own credit.

As credit scores have such an impact on everyday lives it pays to be aware that many of the common myths about scores which circulate have no basis in fact. Being aware of behaviours which can drag scores down is increasingly necessary as some simple common errors can negatively affect those who have no reason to have less than good credit.