If you’re planning to buy a home or apply for a car loan, it helps to know what potential lenders are looking for. Your credit history and credit score play a significant part in determining whether you’ll be approved. Understanding what goes into your report and how your score is calculated can make the process easier. We’ve broken down six of the most common credit myths to help you separate fact from fiction.
1. A credit report and a credit score are the same thing.
A credit report and a credit score are two different things but all too often, people tend to think they’re one and the same. Your credit report includes personal information, like your name, address and previous employers along with information relating to your credit use. This includes the names of all your creditors, account numbers, balances and payment history.
Your credit score is a three-digit number that’s calculated based on the information in your credit report. Generally, the higher the score the more favorably you’ll be perceived by lenders. Credit scores are fluid, meaning they can go up or down when information is added to or deleted from your report.
2. You only have one credit score.
One of the common myths is that there’s a single formula that’s used to determine your credit score. Depending on the type of credit you’re applying for, a lender may consider your FICO score, PLUS score or VantageScore to evaluate your creditworthiness. Each one uses different criteria to calculate your score and rarely are the results of each model the same.
Check out our budget calculator.
3. Mistakes on your credit can’t be removed.
Inaccurate or incorrect information on your credit report can easily drag your score down but you shouldn’t fall into one of the most dangerous myths: the trap of thinking there’s nothing you can do about it. If you come across a mistake in your report, you have the right to dispute it with the reporting agency.
All disputes must be submitted in writing to the credit bureau that’s reporting the information. You’ll need to include your name, address, account information and a description of the error. Once the credit agency is notified of a dispute, they have 30 days to investigate your claim and determine if the information is correct or whether it needs to be updated or removed.
4. Your spouse’s credit doesn’t affect your score.
Getting married can bring major changes to your financial situation and it also has the potential to impact your score. The act of getting married doesn’t directly impact your score regardless of your spouse’s credit history. But when you open a joint credit account or co-sign on a loan for your spouse, it shows up on both your credit reports. If your spouse is responsible for making payments on the debt and they fall behind, both your scores will take the hit.
Also if you apply jointly for a car loan or home mortgage, lender will take both credit histories into account. So if your spouse has a lower credit score, it can affect what you qualify for.
If you get divorced, you’re still financially responsible for any joint debts incurred during the marriage. Even if your divorce decree states that your spouse will take over the payments, the account will still show up on your credit as long as it’s in your name.
5. One late payment won’t hurt your credit.
Missing a payment may not seem like a big deal but it can be devastating to your credit score. Approximately 35% of your FICO score is based just on your payment history and even one late or missed payment can knock off points. The impact may be even worse if your report shows multiple late payments on several accounts. If you miss your due date, it’s best to make a payment as soon as you can to minimize the damage. Also, you may want to call up the company, especially if your payment history is otherwise stellar, and ask them to remove the one indiscretion from your record.
6. Carrying a balance helps your score.
Credit cards can be a useful tool for earning rewards and establishing a solid payment history but only if you’re using them the right way. Carrying a balance from one month to the next costs you money if you’re shelling out big bucks for interest and it doesn’t really improve your score. In fact, it could work against you if your balances are close to or at your overall credit limit. Only charging what you can afford to pay off in full each month and not being too close to your limit is your best bet if you’re trying to maintain a healthy score.
When it comes to your credit, you can’t afford to listen to bad advice. Avoiding these potentially damaging myths can help you to improve your score and maintain a solid credit history.
Photo Credit: flickr