There’s a lot of misinformation out there about credit scores. Even people that consider themselves savvy about their credit score might believe some myths that have gained traction online. Understanding how your credit score is calculated and what impacts your credit report is critical to know so you can protect and improve your score to improve your finances and options in life. Here’s a look at seven truths about your credit score you might not know.
#1 Paying Off Debt Can Drop Your Credit Score
It seems like paying off a loan should be counted as a good sign for your financial responsibility. Logically, that seems sound but when it comes to your credit score, paying off an installment loan can trigger a credit score decrease. Why? Part of your credit score is the mix of credit types. Paying off an installment loan decreases your debt mix and your score. Potential lenders like to see a diversity of credit types so they know you can handle all types of debt responsibly.
#2 An Old Account Closed or Canceled Can Harm Your Score
Do you have an older secured credit card from when you started rebuilding your credit or a store card from a retailer you no longer frequent? If you close an older account or a card issuer closes your account for inactivity, it can decrease your average age of credit which can, in turn, drop your credit score. Also, if you’re carrying any credit card balances, the closure of an older account can drop your score because your overall credit lines drop and your balance then represents a higher utilization.
#3 Not Using Credit Can Hurt Your Credit Score
It might seem like avoiding using credit cards is a good thing and will keep your credit score higher. It’s not true and here’s why. If you never use your credit cards, your card issuer can close your account for inactivity (see #2) or can lower your credit limit or refuse to raise your limit. You might think credit limits don’t matter if you don’t use your cards, but if you ever have to carry a balance and have only lower limits due to low usage, your score can drop because of higher utilization.
#4 Paying Your Bills on Time Doesn’t Raise Your Score
Some people think paying your bills on time ensures a good credit score. That’s true when it comes to debt that routinely reports to the credit bureaus like your mortgage, car loan, and credit cards. Other bills like your water and electric don’t report and won’t affect your score unless the debt gets so delinquent that you’re reported to a collections agent. Paying all your bills on time is the best financial practice, but it won’t raise your credit score.
#5 Your Credit Score Will Not Just Take Care of Itself
You might think if you pay your bills and don’t exceed your card limits, your credit score will be just fine. That’s not always true. Credit report errors, which are fairly common, can throw off your score. Also, unauthorized hard inquiries, identity theft, and mistakes can all drag down your score. In fact, you should monitor your credit routinely to make sure there are no mistakes, fraud, or other issues. One of the easiest ways to accomplish this is to sign up for a free or low-cost monitoring service.
#6 Other People’s Actions Can Impact Your Credit Score
If you co-signed a loan or had a joint account for utilities or other financial responsibilities, the other person involved in that financial transaction can mess up your credit if they fail to meet their obligations. For instance, if you co-signed an auto loan and the borrower doesn’t pay the debt, your score will take a hit. You might not even know until they’ve missed a few payments and your score has already dropped. Monitoring your credit (see #5) can alert you to an issue before things get too dire.
#7 Credit Scores Matter for Many Reasons
You may be one of those people that don’t worry too much about your credit score because you like to operate on a debt-free basis, so you don’t concern yourself with your FICO score. Not wanting to have debt in your life isn’t a bad thing but having a good credit score carries other benefits. You’ll pay less for car and homeowners insurance and certain utilities if you have a better FICO score. A good score can also help you get a job you want if a credit screening is part of the background check.
If you’re rebuilding your credit after bankruptcy, contact Credit Score Keys for help improving your FICO score to make the most of your fresh financial start. Call 919-495-2365