The Top 5 Credit Myths

TOP FIVE MYTHS YOU THOUGHT HURT YOUR CREDIT SCORE…But Have Absolutely No Effect on Your Rating

Contrary to popular belief (and even a fair amount of reason), the following pieces of information are NOT factors in your credit rating:

  1. Your Income

  2. Activity in Your Bank Accounts

  3. Your Status as Employed or Unemployed

  4. The Interest Rates on Your Credit Card Accounts and Loans

  5. Child Support You Pay

 
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WHY CREDIT MYTHS EXIST

Credit myths pervade our society. Blogs, Facebook posts, Tweets, Pins and Snaps fill the Internet with misinformation and misguided tips on building or rebuilding your credit rating. While many loan officers provide potential borrowers with good ideas for building their credit, some offer suggestions that turn out to harm the consumer’s rating. Credit repair agencies and even many law firms can give advice that might help temporarily but can cost thousands of dollars.

Most consumers wisely acknowledge that they understand very little of how commonly-used credit scoring models work. Where can you turn, then, when you want to learn more about building credit, especially in advance of qualifying for a home loan, applying for a job or moving to a new apartment?

REPORTS AND SCORES

When evaluating whether a statement about credit scores is a myth or not, it will help you to remember this one fact:

If a piece of information is not on your credit report, it will neither help nor hurt your credit score.

As a refresher, your credit report lists all your credit-related activities (loans, payments, collections, etc.) from the past 7 to 10 years. You might also know it as your credit history, your credit file, or your credit record.

Think of your credit score (also known as your credit rating) as a grade on how you are doing with credit. It takes into account all the information on your credit report, runs it through a statistical algorithm, and produces a score that predicts the likelihood that you will miss debt payments in the future. By far, the most common credit scores in use by lenders are produced by FICO (a data analytics company), start at 300 on the low end and go to 850 at the top. Higher scores indicate a higher likelihood of the borrower paying on time and as agreed.

Following are the most common myths consumers believe affect their credit score but in reality have no impact at all:

INCOME

Income is not a factor in your credit score. While few consumers express this myth openly, most believe the wealthy have better credit scores than the poor, meaning income must be a factor. Leaving aside the difference between wealth and income, the reality is that neither is a factor in the most common credit scoring models used in the US. In fact, consumer reporting agencies (CRAs) such as Equifax, Experian and TransUnion do not even list income on a consumer’s credit report.

ACTIVITY IN YOUR BANK ACCOUNTS

Along similar lines, your bank account balances and your usage of a debit card have no influence on your credit rating. Still, many believe if they have a well-funded savings account, it will help them build their credit rating. In truth, a consumer’s credit rating indicates his or her likelihood of missing debt payments in the future and not how much money he or she has in the bank. In reality, consumers deal with debt payments differently than they do with cash. Consequently, credit scoring models do not use savings account and bank account balances when determining a consumer’s credit rating.

That said, individual lenders typically ask borrowers about income and savings when deciding to approve a loan and how much to loan.

Similarly, debit card usage will never build your credit rating. Even electing to process your debit card payment as credit at the store has not impact on your credit score. Using a debit card does not correlate to your ability and tendency to make your debt payments on time and as agreed.

This myth likely stems from the generally held belief that using a debit card is more responsible than using a credit card. In reality, payments made with checks, cash, bitcoin, checking account direct debits, debit cards and prepaid cards (even those with a Visa or MasterCard logo on them) have no effect whatsoever on your credit rating. In fact, even purchases actually made with a credit card do not affect your credit rating. Rather, credit card balances, payments and general “account activity” factor into your score.

EMPLOYMENT

Employment is not a factor in your credit score. This myth persists for good reason. Individuals who have been unemployed and who are preparing to look for employment in the coming few months actually have the right to a free credit report. More and more employers include credit checks as part of their new hire background checks. Your credit report may even list your current and/or former employers. It is logical though wrong to assume there must be a relationship between credit and employment. While lenders typically request your employment status on loan applications, such information does not factor into consumer credit scores. No information on a credit report having to do with the consumer’s identity (name, address, phone number, employment, social security number, marital status) factors into the statistical scoring models.

INTEREST RATES

While high interest rates typically lead to higher monthly payments and, consequently, more financial difficulties, interest rates on your credit card, car loan, home mortgage and other loans have no effect on your credit rating. If your credit card company raises your interest rate, it may lead to a higher monthly payment, but it will not hurt or help your credit rating.

CHILD SUPPORT

Child support obligations and payments are not generally reported to the CRAs. However, the Fair Credit Reporting Act allows for the reporting of delinquent child support accounts if reported and/or verified by a local, state or federal agency involved in the collection or distribution of child support payments. If such is the case, the account typically reports in the public records section, though some jurisdictions may report differently. That said, FICO claims to ignore child support payments altogether in its scoring calculations. In reality, the truth rests somewhere in the middle. Because methods for reporting child support obligations in arrears can vary by state and agency, some child support payments might show as 30 to 180 days late in the credit report payment history section. Other consumers report that after paying off their back child support, the state agency removes the account from the credit report completely.

THE REALITY

FICO publishes a list of five factors in its credit score model: 1) payment history, 2) usage and balances, 3) age of accounts, 4) new applications, and 5) mix of account types. However, these five factors represent, albeit imperfectly, nearly 40 codes that CRAs report as factors in your credit score.

With so many components in your credit score, it can be tempting to lean on logical but inaccurate beliefs to make sense of how to build or rebuild your credit. Since your credit score attempts to predict your future credit behavior, keep in mind that it bases such predictions on past credit behavior. Unless it is credit-related and on your credit report, it is not a factor in your credit score.