Myth Busters takes on credit scores

Posted by:

One of the most popular shows on television for 14 seasons since its debut in 2003, Myth Busters has been getting to the bottom of urban legends, unraveling paradox, and frankly, blowing a lot of stuff up along the way. After filming 282 episodes before the show was cancelled in March of 2016, Myth Busters has almost single handedly made science, physics, and engineering cool again with its brand of “science entertainment” with colorful hosts Adam Savage and Jamie Hyneman.

While watching Savage, Hyneman and company dispel common conundrums and answer nagging questions like, can you waterski behind a cruise ship, what’s the best cure for eating fiery hot chili peppers, and what would happen if you affixed a battering ram to a truck and ran through rush hour traffic (plus, plenty more explosions)?

But there are plenty of other myths, misnomers, and mysteries that could use clarifying, including in the realm of credit scores. We apologize for our lack of explosions, but here are our top 10 credit score myth busters:

1. Myth: The more income you make and money you have in the bank, the better your credit score will be.
Busted! Credit reporting agencies or credit bureaus provide lenders with information reported by your creditors about how well you repay them. They don’t receive any data about your income or even employment status. That includes the status of your checking and savings accounts and any other assets investments. Credit reports are only concerned with how you repay your creditors, not how much money you have.

2. Myth: I don’t really need a good credit score unless I’m applying for a new loan.
Busted! A bad credit score can hurt you in a lot of ways that have nothing to do with taking out a loan. Employers are screening their potential employees for credit score like never before. It’s estimated that 1 in 4 unemployed Americans have been subjected to a credit score check when they applied for a job, and 1 in 10 has actually been denied a job because of a bad score or something on their credit report! Certain employers and jobs factor in credit more than others, like financial services, that calls for an employee to handle large amounts of client funds, or calls for high security is likely to look at a candidate’s credit score. Likewise, renting a house or apartment, opening utility accounts, and even getting a new cell phone are all also impacted by your credit score.

Even insurance companies are utilizing credit scores, since data shows that the higher a consumer’s credit score, the less likely they are to file an insurance claim. Conversely, consumer with lower credit scores file far more claims, costing the insurance companies more. In fact, 90% of homeowners and auto insurers now use credit score in determining who to cover and what premiums to charge.

3. Myth: Everyone is born with a credit score.
Busted! In fact, a credit score is not automatically “assigned” to people at birth or any other time, and a whole lot of people have no credit score. If you don’t have a valid social security number, don’t have a credit card or other debt, you’re probably “Credit Invisible,” a term that applies to about 35 million American adults. According to the recent CFPB report, only 188.6 million American adults with credit reports that are usable and reported, or 80% of the population.

4. Myth:  When you get married, you and your spouses’ credit scores combine.
Busted! Getting hitched means sharing almost everything, but merging credit scores is not one of them. In fact, your credit score is dependent upon your personal credit history and your unique Social Security Number, neither of which are affected by getting married.  Your credit scores will not merge and will not become joint, unless you add your spouse to your credit cards, or open a joint account with your future spouse.

Different states have different rules for obligation of your marital partner’s debts but you’ll always still have your own separate credit report, not one that is combined between husband and wife.

5. Myth: The Credit bureaus make lending decisions.
Busted! The three major credit bureaus: Experian, TransUnion, and Equifax, don’t ever make decisions about lending you money or the status of your credit accounts. Their role is to collect data about your use of debt and compile a credit score to share that with banks, lenders, or retailers who are considering lending you money so they can better gauge risk.

6. Myth: If you don’t use your credit or don’t hold debt, your score will improve.
Busted! Not true – if you have blank credit history, that only shows future lenders that you don’t have an established history of managing debt responsibly and paying on time.  Sometimes, no credit history can be a big negative than a marginal credit score! The best way to improve your score is by keeping a good mix of revolving, installment, and mortgage debt from responsible lenders, paying on time and maintaining low balances.

7. Myth: You should pay off and close your credit lines to increase your score.
Busted! It seems like common sense – pay off a credit card to $0 balance and close it down and you’ve just demonstrated financial responsibility so your credit score will go up.  Unfortunately, that’s not the case – what you just did was erase an established history of responsible payments.  Credit bureaus are all about assessing your risk, and the more evidence that you can manage your existing credit lines correctly, the better.  Some old accounts are worth closing, but for your oldest accounts, you should pay the balance down below 30% of the total available credit limit and keep making monthly payments to improve your score.

8. Myth: Checking your credit will really hurt your score.
Busted! In reality, having someone pull your credit won’t sink your credit rating significantly. The different types of credit inquiries are broken down in two general groups; hard inquires and soft inquiries.  Hard inquiries occur when a bank, financial institution, lender or credit card accesses your credit report for the purpose of making a lending decision. Soft inquiries, on the other hand, are when a person or company checks your credit report.  Usually these come from when an employer checks your credit, preapproved credit card offers, and when you pull your own report.

Soft pulls don’t hurt your score at all and hard pulls won’t lower it significantly if you don’t apply for loans irresponsibly and erratically. The credit bureaus know that you’ll get your credit pulled several times when shopping for a new loan so if you do them within a certain tight timeframe, like within 30 days, they’ll just count them as a single credit pull.

9. Myth: No one really knows the formula that makes up your FICO score.
Busted! We know exactly what factors go into calculating your credit score, and therefore how to maintain or even improve that number. While the exact algorithm is proprietary, we know that your credit score is comprised of:

30% Your total balances owed
35% Payment history
15% How seasoned your accounts are
10% Good mix of revolving, installment, and mortgage debt
10% New credit

10. Myth: The credit bureaus are always accurate with reporting.
Busted! You’d be surprised how many errors, duplicate, or outdated items appear on credit scores that hurt consumers! A 2012 study by the Federal Trade Commission reported that at least 20% of consumers have an error on at least one of their three credit reports (which largely determine your credit score.) That’s 1 in 5 of you who have something glaringly wrong on your credit reports! The same reported estimated that 13% of consumers had credit-report errors that impacted their credit scores. These days, identity theft also impacts about 8% of the population per year, so it’s essential you review all three credit reports thoroughly and address any errors.

0

About the Author:

  Related Posts

You must be logged in to post a comment.