CNN — You probably already know that you need a good credit score to get the best interest rates on a mortgage or car loan, which can make a big difference to your budget over time.
“With something like a mortgage, even a minor difference in rates can have a big impact on your monthly payment and can mean tens of thousands of dollars or more over the life of the loan,” said Justin Pritchard, certified financial planner and founder. financial approach.
But that’s just the beginning of the impact the three-digit number has on your financial life.
Your credit score, an assessment of your creditworthiness, can also affect the rate you pay for insurance, your cell phone plan, and even your ability to land certain types of jobs.
But despite the importance of credit scores, they remain largely misunderstood. Here is an overview of several common misconceptions.
#1: Having a credit card balance will improve your score
Nearly 60% of consumers believe this myth, according to a recent survey by US New & World Report. One of the main factors in determining your credit score is your credit utilization rate, or the percentage of your available credit that you are using at any given time. The lower the number the better, but try to keep it below 30%.
“You don’t want to keep a balance because that just increases your utilization rate,” said Jirayr R. Kembikian, certified financial planner at Citrine Capital.
#2: There is only one credit score
Although FICO is the most popular score provider, different types of lenders use different versions of the score. Additionally, a growing number of lenders are working with FICO competitors, such as VantageScore.
“There are many, many different credit scores, and the score you just saw may not be the same score lenders see when they review your creditworthiness,” said Matt Schulz, chief analyst credit at LendingTree.
Even though the scores are slightly different, they should point in the same direction, Schulz added. So if one score drops significantly and the other doesn’t, it could indicate an error or some other problem in one of your credit reports.
#3: It costs money to check your credit
You can get your credit reports from the three major credit reporting agencies, Equifax, Experian and TransUnion, each week for free at annualcreditreport.com. Most experts suggest checking your reports at least once a year for errors or evidence of identity theft, and federal law requires agencies to allow you to do this for free. Credit reporting agencies started offering weekly access to reports during the pandemic, but that may end soon.
“One of the best ways to improve your credit score is to fix errors on your credit report,” Schulz said. “People would be surprised how often errors occur.”
Credit reports don’t include your score, but you can still access some scores for free through websites like LendingTree and Credit Karma, or through your credit card issuer.
#4: Closing your old credit cards can increase your score
The length of your credit history is another factor that goes into your credit score. So keeping your oldest cards open and using them occasionally (and paying for them) helps rather than hurts your score.
Similarly, closing an account will damage your score.
#5: Your spouse’s score can impact yours
Credit scores are for individuals, not couples. While lenders will look at both of your scores if you’re applying for a joint credit card or mortgage, your scores are separate. So if your spouse has a low score, it won’t affect the credit you apply for on your own behalf.
#6: Opening a new card will hurt your credit
Any new credit, including credit cards, will cause your credit to decline in the short term, but it won’t affect your score in the long term. It’s the investigation by the new lender that will likely take a few points off your score, but if you have good credit, it should pick up quickly.
“If you have several years of good credit behind you, you don’t have to worry about opening a new card, as long as you don’t plan on getting a mortgage within the next few months,” Pritchard said.
#7: Higher income means higher score
Although lenders take your income into account when deciding how much to loan you, the amount of money you earn is not a factor that credit agencies use to determine your score.
“You can have someone with a lower income and a great credit rating, and you can also have the opposite – someone with a very high income and a terrible rating,” Kembikian said.
#8: Co-signing a loan won’t affect your credit
From the point of view of a credit agency, co-signing a loan is like taking out a loan on your own. This loan balance will affect your credit utilization rate and late payments will hurt your credit score.
“If the person you’re co-signing for isn’t responsible and doesn’t pay their debt, for whatever reason, it can have a gigantic negative impact on your credit score,” Kembekian said.
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