Busting credit score myths
(MoneyWatch) Do you review your credit report at least annually, and know your credit score? You should. You don't even need to restrict your credit score review to once a year, in fact: Since each of the major credit agencies (Equifax, Experian, and TransUnion) will send you your report once per calendar year, you can space them out and see your credit every quarter or so.
All that data isn't helpful if you don't know fact from fiction when it comes to your credit rating. Recently, Quizzle published a list of the top credit score misconceptions, and there are some interesting myths in the list. Here are some facts you might not know -- or know wrong -- about your credit:
Settled debts don't get dropped from your credit report. Many people think that late payments and bad debts get dropped promptly from your credit report once the problem is resolved. Unfortunately, that's not the case - they linger for 7 years, and bankruptcies stay on your report for 10 years.
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Paying with cash does not help your credit score. This doesn't factor into your credit at all; credit reports (and credit scores) care only about what you buy on credit; if you stop using your credit cards in favor of cash, it doesn't really factor into your equation at all. It's more important to use credit responsibly than to stop using it entirely.
Closing credit cards does not improve your score. This is a close cousin of the myth about paying in cash, though it is a little more complicated. Closing out credit cards is unlikely to improve your credit rating. In fact, it can hurt. Agencies want to see a low credit utilization -- the ratio between the credit you're using and the credit you have available. Ideally, you're keeping that number under about 30 percent. As you can see, closing credit card accounts can drop your available credit without affecting your outstanding balance, and that can be bad.
Making credit inquiries won't necessarily hurt your credit. Many people think that just looking at your credit will harm it, but that's not always true. Soft inquiries -- such as when you request your credit report for personal reasons -- generally have no effect on your rating. Hard inquiries -- from banks, credit cards, and loan companies -- definitely do have a small but measurable impact on your score.
A high income will not improve your credit rating. Many young folks fresh out of school think that their credit score will go up as a natural consequence of getting better-paying jobs. That's not the case; again, your credit rating is only a measure of how you manage your credit, so income is irrelevant to the equation (though it might help you pay down your credit).
Photo courtesy Flickr user 401(K) 2013
