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by David Leto
March 28, 2018
by David Leto
March 28, 2018
When it comes to credit scores and credit reports, the so-called "conventional wisdom" is full of common myths and flat-out inaccuracies. The fact is, some of the most common misconceptions can actually hurt your score. With that said, here are five common credit score myths to consider.
Many consumers believe their credit scores will improve if they close unused credit cards. The truth is, closing an unused account could hurt your score. Credit scoring models place a big emphasis on your credit utilization ratio.
This is the ratio between the amount of available credit to you and the total credit you actually use. If you have a low credit utilization ratio, you will have a higher score.
If you close an unused credit card, that reduces a portion of your available credit, which can increase your credit utilization ratio and lower your credit score.
The truth is, there is a wide array of credit scoring models that issue countless credit scores. However, the most recognized credit score is the one issued by FICO. For example, most mortgage lenders will use your FICO score to determine your creditworthiness.
By contrast, if you are looking for a bad credit auto loan, a lender might use the VantageScore 3.0 credit scoring model. The point is, there is not one score that applies to every consumer.
Your income has nothing to do with your credit score. Most credit scoring models do not consider your income when issuing a credit score. What does impact your score is your payment history, credit utilization ratio, age of credit and credit inquiries.
However, if you earn plenty of income, a credit score may not matter much in terms of your buying power.
Although there are laws that regulate how the three major reporting agencies, TransUnion, Experian, and Equifax report credit, the federal government has nothing to do with the day-to-day operations of the reporting agencies. FICO is also an independent company that has no ties to the government.
This myth really confuses many consumers. In truth, the credit bureaus make no determination that your credit is either good or bad. The bureaus merely compile credit information provided to them by lending institutions. From there, other lenders will use the information in your credit report to determine your level of creditworthiness.
There are many other common misconceptions in the world of credit reports, so it is vital that you do your homework before applying for your next loan or credit card. Arm yourself with the facts, and do not believe everything you hear or see about credit scores and credit reports.