In the latest report of Consumer Federation of America (CFA) and VantageScore, most of American know credit scores is the metric used in mortgage lenders and credit card issuers. But only 1 in 4 people surveyed was aware of low credit score (less than 620) would cost the borrowers up to USD 5000 and 50% of them didn’t know employers, landlord, insurers check credit scores before any respective approval. It seems people have many misconceptions still about their credit scores. Here are the most serious incorrect understandings from questions sent to me.
1. Closing old accounts to raise your score
After publishing Tips improving credit score quickly in a month, the first question I received was to close a 5-year-no-used credit account in reddit. I suggest him to keep storing this card because it’d hurt the credit score instead of boosting the number. The reason is credit history weighed 15% in credit score algorithm. Adding to that, canceling an account will increase the credit utilization rate because of the lower credit limit. The score you could save is more valuable than some bucks for the annual fee.
You can use this old card for small payments like electricity, water, cellphones and pay off after that. Remain it active will reward your score eventually.
2. Checking your credit reports lowers your credit scores
There is only one credit report inquiry hurting your scores if it’s a request from credit companies or mortgage lenders. Why? It’s an obvious sign that you need more credit and your debt gets bigger, the next lenders would seriously consider that by a lower score. That’s we called hard inquiries.
Therefore, soft credit inquiries won’t lower your credit scores. Soft inquiry would be your free annually checking for credit dispute, financial status acknowledge, or a check of prospective employer. Technically, any credit report pulling which doesn’t relate to changing the credit number is harmful no more.
Related story: Repairing credit score after bankruptcy
3. The first missing payment will not be crucial
If you don’t know how to determine FICO credit score at credit report companies, the payment history take a biggest piece of FICO algorithm ‘cake’, 35%. Just one late payment, plus a large balance on your card, would drop 100 to 300 points on your credit score. Only one misstep could take up to 2 year to bounce your score back to the previous point. So I warn you that paying bills on time matters and is very crucial.
4. Your credit score separates from a co-signing loan
This is the misconception from questions to dispute the ex-spouse’s credit account on credit report.
Anything related to finance will impacts your credit score so you share responsibility when you guarantee somebody’s loan. If the borrower fails to pay off the debt, it could impact your own credit scores. Joining a loan or co-signing loan mark you as the person in charge of it. The activity of joint account will be updated on both account holders’ reports. When you want to put your hand out of this, you must find a person to hand the loan or request the creditor taking you off the account.
5. Employers don’t check credit reports before any employment
I repeated twice above so it happens indeed. Most employers want to know your financial stability and debts because they tell the companies about how possible you can manage the company’s money, and other sensitive information. Thus this inquiry is more common with high management positions. The regulation allows them to do it, but it could have limitation with certain professions if the state rules so.