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Credit reports and scores can confuse
Credit score misunderstandings explained
Most people understand that if you have credit, you will have a credit history that can be shown in a credit report and that you will also have a credit score that demonstrates your financial health. Beyond that, many people are confused about how they work and what will help and what will hurt. We will examine a few common misconceptions.
Continued below
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Financial health is important, so you should understand how credit scores work
As we have written before, it is quite difficult to function in society today without credit. No one pays cash for cars anymore, so you will have to take out a loan if you want to buy one. As soon as you are granted that loan, you have a credit report. That report will show not only your loan, but every other financial transaction of note that you have ever had. The report will also indicate whether you have paid your bills on time or late, whether you have ever filed for bankruptcy and whether or not you have ever been delinquent on your taxes. That report is used by everyone you apply to for another loan or more credit.
While everyone knows about the existence of these reports and the associated credit score many misconceptions still abound. A lot of consumers don’t understand just how the system works or how their score can be affected by things they do or don’t do.
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We will examine a few myths and misconceptions about credit reports and credit scores.
- You have just one credit score - Probably not. Your credit information is stored by all three credit bureaus - Experian, Trans Union and Equifax. Until recently, they each used a different scoring system, so an inquiry to each of them would probably produce three different credit scores. They recently announced that a new system, called VantageScore, would be used by all three bureaus. Will that make your score the same at each bureau? Probably not, as each bureau has different information about you on file. If the information is different, the score will be, too. The best way to find out about discrepancies in your score is to request a copy from each bureau.
- Checking your report too often lowers your score - Not true. You can check your credit report as often as you like. On the other hand, too many applications for credit within a short period of time can lower your score. If you submit ten different credit card applications within a month, your score may decrease. Checking with a few mortgage companies within a few weeks’ time probably will not affect it, as the system is designed to acknowledge that some people “shop around” for loans.
- Filing for bankruptcy erases debt - Not necessarily. Filing just gets you a date in court. At that point, the judge gets to decide if your debt will be eliminated. New laws may require you to pay back a portion of your obligations. Even if your debts are eliminated, your credit report will show the bankruptcy for the next ten years. Try to avoid that, if you can.
- Your score is affected by your salary - Not at all. Your score is simply a function of how well you manage the credit that is available to you. Your salary is irrelevant; it’s all about how you manage the debt. Pay on time and the score goes up. Pay late, and the score goes down. This is true no matter how much you earn.
We will discuss some more myths in part two of this article.
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