Thrifty Thinking: 10 Credit Myths Debunked

By Experian
When it comes to debt, credit reports, and credit scores, conventional wisdom is peppered with
myths, misunderstandings, and misrepresentations. Credit is a tool. Like any tool, it's neither
good nor bad in itself. What matters is how you use it. April is Financial Literacy Month and a
good time to clear up these misconceptions. Here are 10 credit myths debunked.

Myth #1: Debt is Debt
Not all debts are equal. Say you've got a $150,000 debt on your credit report. If it's there
because you maxed out your credit cards to throw a birthday blowout for yourself two years ago,
then you're in trouble. Today, that debt is giving you nothing but memories (and maybe an
ulcer). But if that $150,000 is your mortgage, then you're probably just like millions of other
responsible homeowners. That debt is giving you a warm place to lay your head at night.

Myth #2: Checking Your Credit Report Will Hurt Your Credit Score
A notation called an "inquiry" goes on your credit report every time someone (including you)
looks at your file, and rumor has it that inquiries can hurt your score. Well, yes and no. An
inquiry affects your score only if it's related to a credit application that you have submitted. If you
apply for a loan or a credit card, your score might fall, because that application suggests you'll
be adding debt. But if you simply look at your own credit report, the resulting inquiry won't affect
your score. If anything, checking your report is a sign of responsible credit management, though
you don't get points for doing it.

Myth #3: Closing a Credit Card Will Improve Your Credit Score
If you have a credit card you don't use, you're unlikely to improve your score by closing the
account. In fact, closing the card might even lower your score at first. One important thing
scores use to measure risk is how much of your credit card limits you use — a ratio known as
"credit utilization." When you close an unused account, you reduce your total available credit, so
your credit utilization rate goes up. (Of course, if an unused card creates an unbearable
temptation to spend, you may be better served in the long run by closing the account.) Scores
usually bounce back up after a few months, if your credit report is otherwise in good shape.

Myth #4: You Only Have One Credit Score
There isn't just one single credit scoring formula that applies to all consumers in all situations.
By some estimates, there are more than a thousand scoring models in use in the credit
marketplace. A consumer could therefore have dozens or even hundreds of different credit
scores depending on the lender using it and the types of lending being done. Lenders and
others check your credit score for different reasons, and each formula looks at your credit
history in a different way, giving different weight to various factors.

Myth #5: Credit Bureaus Give Good and Bad Scores
Credit bureaus do not create credit scores. Credit bureaus collect information about your debts
and use that information to build a credit report. Credit scores are generated based on
information in your credit report. Those scores are neither objectively "good" nor "bad." They're
a measure of risk. It's up to lenders to decide whether a given score meets their criteria for
extending credit. And, scores are usually just one factor in their decision. A "good"score might
not mean much if you don't have a job or any assets. Likewise, a high income and a stack of gold bars might outweigh a "bad" score.

Myth #6: Better Job, Better Score
Your income has no direct effect on your credit score. Scores are based only on the information
found in your credit report. Your report includes a lot of information about your use of credit and
your management of debt. But it doesn't include your income. In fact, it doesn’t even indicate
you have a job. It lists the employers you’ve included in past applications, but if you haven’t
applied since you last changed jobs, it might not even list your current employer. That said, your
employment situation can affect your score indirectly, in terms of your ability to pay your debts.
And when you apply for credit, lenders will probably ask about your income.

Myth #7: Spouses Have a Joint Credit Report
There's no such thing as a joint credit report — for married couples or anyone else. Married or
single, you have your own credit report. If you're married, you and your spouse may have a lot
of joint accounts, such as mortgages, car loans and shared credit card accounts. Those joint
items will appear on both your credit reports and will affect both of your scores. But your credit
report is yours and yours alone.

Myth #8: Paying Debts Erases Them
Pay off a debt and you've eliminated your obligation — but the evidence of that debt can stick to
your credit report for years. If you pay your debts on time and in full, you will likely want your
paid-off accounts on your credit report because they show that you've used credit responsibly.
If, on the other hand, you'e been chronically late, missed payments or defaulted entirely, that's
a problem. Most negative information can remain on your report for up to seven years; some
bankruptcies can stay there for up to 10 years.

Myth #9: For Those With Little or No Credit, It’s Difficult to Build Credit
While people with limited credit history and low credit scores may have a hard time building
credit, new tools are becoming available to help. One way to instantly increase your credit score
is by using Experian Boost, a free service that incorporates your utility and mobile phone
payment history into your Experian credit file. This can help you build up more credit history,
which helps improve a credit score. It is a great first step but don’t stop there – make sure to pay
all of your bills on time and don’t take on too much debt.

Being added as an authorized user or setting up a joint card (i.e. with a parent) is also a great
way to build positive credit history. You might also consider opening a secured credit card
account. That means you deposit money in a savings account that is tied to the card. If you
don’t pay on time, the lender is protected – or secured – because they can withdraw payment
from your savings account. However, they would still report the payment late, so be sure you
always pay on time. If you do, you can build a positive credit history and start saving at the
same time.

Myth #10: Credit is a Measure of Your Value
Credit scores are designed to evaluate how big of a risk it would be to lend you money. That's it.
If your score is low, it's because your credit history suggests that there's a higher risk that you'll
default on a debt. It doesn't mean anyone thinks you're a bad person. Good, honest people can
have low scores (and yes, truly awful people can have high scores). What you can do is work to
generate a positive credit record: pay bills on time, reduce balances and apply for credit only when you need it.