Time to Bury These Myths About Credit

Online credit history form on a digital tablet
Courtney Keating/Getty Images
By Jenna Lee

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, Equifax (EFX) 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.

Implication: This has the potential to hurt you the most. If you have a major error on your credit reports, your credit score could be lower than it should, which can impact your ability to get approved for credit or cost you thousands of dollars because of the undeserved subprime interest rates that have been attached to your credit cards and loans. Even a seemingly meager 25 point difference could drastically affect your finances.

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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Credit is the devil and will lead to a cashless society. Orwell was an optimist.

April 26 2014 at 4:58 AM Report abuse -1 rate up rate down Reply

Who are these credit agencies anyway? All are private companies. Including the one
that has posted this article . We have never had this volume of stolen idenities before
until all the online activity such as bill pays, online banking, and yes online credit scores.
Just a thought, Like a said earlier, who are these companies? How are they being allowed
to have all this personal data? Yet we will never see thier employees or thier faces! Yes and
stop all this bullshit of 3 major credit bureaus. Wonder if anybody ever challenged these
companies in court of having personal information without permission and operating as a private company. Last time I Checked my report was through the mail and they had me related
to people I've never met. Also if any information is wrong you must work very hard to correct it.

April 25 2014 at 2:34 PM Report abuse +1 rate up rate down Reply