Some credit myths refuse to die. Let's go over three major myths that you should stop believing today.
You Only Have One Credit Score
Reality: This myth likely exists because we want it to be true. Credit scores would be so much easier to understand and cause less stress if we received the same scores from each lender. However, the reality is that you actually have many credit scores.
This is mainly due to a few reasons. First, your credit score is based on your credit report, so if the three major credit bureaus -- Experian (EXPR), Equifax and TransUnion -- have differing information, your scores can vary. Dozens of credit scoring models can be used to calculate your scores –- yes, even within the popular FICO model. If one scoring model emphasizes your on-time payment history while another puts more weight on your credit utilization rate, you're bound to end up with different scores, even if they're based on the same information. Implication: Believing in this myth could scare you into unnecessarily paying for your scores each month. Many consumers subscribe to credit monitoring programs, thinking they are getting the same score their mortgage lender and/or credit card issuers see. However, as explained above, the likelihood of that happening is not good.
Takeaway: Be wary of purchasing information about your credit score. There's no way to guarantee the score you buy is the score a potential lender will pull. According to a 2012 study by the Consumer Financial Protection Bureau, different scoring models place consumers in the same credit range 73 to 80 percent of the time. So although you may hear that you should only buy and trust FICO scores, the high correlation among different scoring models proves that free scores (which you're entitled to receive from the three credit bureaus each year) can actually be useful and trustworthy.
You Need to Carry a Balance to Have a Good Score
Reality: You don't need to carry a balance at the end of the month to improve your credit health. The balance reported to the credit bureaus is typically the balance from your last statement -– not what was left over after you received that statement and paid the bill.
Implication: If you believe in this myth, you may be carrying unnecessary debt, paying interest for no good reason and lowering your credit score by keeping your credit utilization rate higher than it needs to be.
Takeaway: Use your credit cards, but pay your bills in full as often as you can. You don't need to pay a penny of interest to have a good credit score.
Credit Bureaus Are Always Accurate
Reality: This is another myth that we wish could be true – wouldn't it be great if we didn't have to worry about incorrect information on our credit reports? However, the sad reality is that one in five consumers have errors on at least one of their three major credit reports, according to the Federal Trade Commission, and these could negatively affect their financial situation.
Takeaway: It may not be fun, but if you care about your credit health, it's important to pull your full credit reports from AnnualCreditReport.com each year, scrutinize them for errors and dispute any errors you find. With your credit health on the line, the time and effort you put into fighting incorrect information will be well worth the trouble.
The bottom line: With the Internet at our fingertips, it has become easier than ever to educate, take charge and improve our financial situations. Use this information highway to your advantage and begin working on improving your credit health today.
Jenna Lee is the social media manager for CreditKarma.com, a free credit monitoring website.
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