Unlike fictional ghosts and goblins, your credit score is very real and inextricably tied to your financial health. But, there are plenty of misconceptions out there about what that three-digit number really means.
So just in time for Halloween, here are seven credit score myths (and the truths that lurk beneath the surface) — so you don't reel in horror next time you check your score.
Myth 1: You only have one credit score
The Truth: The credit industry uses many different scoring models to generate consumer credit scores. Lenders, creditors and other third parties don’t all use the same formula, and they weigh the information contained in your credit report differently. To complicate matters, the information used to calculate your credit score may vary based on the credit bureau supplying your report (see Myth two to learn more).
In short, there’s no one true credit score. However, the same factors tend to affect your credit score regardless of scoring model. You can read more about how to read your credit report here.
Myth 2: All credit reports contain the same info
The Truth: There are three major credit bureaus: Experian, Equifax and TransUnion. All three maintain separate credit reports on consumers. Each version of your credit report may not contain all of the same information. Some reports will be more detailed than others, and the information may vary because some companies don’t report activity to all three credit bureaus.
Myth 3: Checking your credit report hurts your credit score
The Truth: This myth is partially based in fact - when a lender or creditor initiates a hard inquiry into your credit, that inquiry does land on your credit report and ding your credit score a few points (the lasting damage is minimal as long as you don’t submit too many credit applications in too short a time frame). But hard inquiries only occur when you apply for credit.
Checking your own credit report doesn’t affect your credit score in any way, so knock yourself out.
Myth 4: Debt is bad for your credit score
The Truth: Taking on too much debt and missing loan payments is bad for your credit score, but simply having debt is not harmful at all. In fact, responsibly managing a mix of debt types shows lenders and creditors that you are a low credit risk, and will raise your credit score over time. Borrowing is often necessary to get a car, buy a home and build credit, so debt itself is not something to fear.
But, if you are looking to pay off your debt, here are six easy steps to get you started.
Myth 5: You should close old credit cards
The Truth: If you can’t hang onto a credit card without maxing it out or missing payments, you should close it to avoid getting into trouble. But if you no longer use an old credit card, you’re better off leaving it open. The length of your credit history and your debt utilization ratio are two factors that affect your credit score, so keeping an old credit card open with a zero balance will benefit both.
Myth 6: Paid off debts no longer affect your credit score
The Truth: Even after they’re paid off, debts can remain on your credit report and affect your credit score for up to seven years. If you always paid your debt on time and managed it responsibly, this is a good thing. But if you were frequently late on payments or the account went to collections, this can drag down your credit score for years to come. Check out these seven good behaviors that can actually mess with your credit.
Myth 7: Bankruptcy wipes the slate clean
The Truth: Bankruptcy can help you discharge debts you can’t afford and get your finances in order. But when it comes to your credit score, bankruptcy is devastating. Bankruptcies can stay on your credit report for seven or ten years, depending on the type. And while it’s possible for your credit to recover, bankruptcy will affect your credit score until it falls off your credit report.
Myth 8: Money can buy a good credit score
The Truth: Having a lot of money can make it easier to achieve a good credit score, but it’s no guarantee. People with high incomes can have terrible credit, and people without a lot of money can have great credit. Income is not a determining factor; it’s more important to live within your means and always make your payments on time.
Want to get a jump-start on fixing your credit? Check out these five ways to improve your credit in 30 day or less.