When I meet with people who are dealing with building credit for the first time or rebuilding/repairing their credit after some financial misadventures, we often talk about the components of their credit score and how they can make an impact on that score. Fairly often, someone will say “I have heard…” and then tell me something they’ve heard about credit scores. After hearing the same “I have heard” items or myths repeatedly, I thought it might be a great time to address a few of them so that you can start the new year with a few facts instead of myths.
Myth: Carrying a balance from month to month on my credit cards is a really good thing for my credit score.
Reality: Carrying a balance is good for one thing: making sure that you pay interest to the credit card companies. This myth comes from the fact that credit card companies report activity to the credit bureaus and carrying a balance and being charged interest almost guarantees that activity will occur. Another way to accomplish the same goal, without paying interest, is to periodically use a card for a small purchase and pay for it in full when the bill comes in. This still generates activity, it is positive activity and your credit history will still be built with positive activity.
Myth: Your income is a part of your credit score.
Reality: It isn’t a part of your credit score, but it is important when you apply for a mortgage. Your credit score deals ONLY with your credit history, not your income. Income becomes important when calculating things like your debt-to-income ratio, which is vitally important when trying to get a loan, but it has no part in your credit score.
Myth: Having large credit lines or getting an increase in your credit line will hurt your score.
Reality: The opposite is actually generally true. One of the biggest components of your credit score is called the “utilization rate” which is the amount of money you owe (outstanding debt) divided by the total of your credit limits. This percentage is your utilization rate and accounts for 30-35% of your credit score. The best ways to reduce your utilization rate? Pay down the debt (the top half of the ratio) or increase your outstanding credit lines (bottom half). I’d vote 99 times out of 100 to reduce debt as the more effective way to attack this, but increasing your credit lines won’t usually hurt your score in the long run. (Applying for a lot of new credit can hurt you in the short term.)
Myth: Credit repair companies can get bad stuff off of your credit report.
Reality: You could pay a whole lot for a whole lot of nothing. If it’s a fact that you were 90 days late on your credit card bill, no credit repair company can alter that fact or have it removed from your credit report. They can remove incorrect information, like accounts that don’t belong to you, addresses that aren’t yours and any other factual information. You can do the same thing if you review your credit report from each of the 3 credit bureaus annually and dispute items that are not factual. That makes more sense to me than paying a company to do at a hefty price what you could do for free in just a few minutes per year.
Those are the most common things I hear about credit scores that I’d like to clear up. But, along with simply setting the record straight, I’d like to give you a few ways to stay on top of your credit score and your credit history. There are two websites that I use to keep track of my credit score. CreditKarma.com and CreditSesame.com are each affiliated with one of the three credit bureaus and when you sign up with these sites, you can get your credit score for free (my favorite 4 letter word) rather than paying for something that should be free. In addition, you are entitled (one of my least favorite words, but I’ll save that rant for a future blog) to one free credit report per year per bureau. You can avail yourself of that benefit at AnnualCreditReport.com and if you’d like to not go a full year between credit reports, you can order one every four months. I set an Outlook reminder for the 1st of January, May and September and when those reminders go off, I visit AnnualCreditReport.com and order a report from one of the bureaus. I’m never more than 4 months away from reviewing my credit report and removing any factual inaccuracies, and I’m NOT paying anyone to do it for me. If I hear more credit score myths…I’ll keep you posted.