4 Surprising Credit Score Myths

Your personal credit score is critically important for accessing credit at favorable terms.  Your credit score directly impacts your ability to finance a car or a mortgage as well as what interest rate you receive. 

However many people don’t fully understand how their credit score is calculated and how they can positively impact their credit score by making small changes to their financial habits.

This lack of awareness can lead to a variety of credit score myths that are based on partially correct information.  We’ll take a look at a few popular credit score myths and examine their validity.

Improving Your Credit Score Requires Many Years

Many people get frustrated with their credit score because it can feel like score improvements only increase very slowly over many years. 

If you only focus on meeting your monthly credit card payments on time, this myth can be true because it can take many months to see the impact in your credit score. 

However, there are a few simple ways to increase your credit score fast.  If you’re already starting with a strong credit score, you might be surprised to learn that the fastest way to increase your credit score is by opening a new credit card.

Opening a new credit card can rapidly increase your credit score because of the beneficial impact of an improved credit utilization score.  If you already have a good credit score, a new credit card will include a higher credit limit.  By not increasing your monthly spending, your debt utilization score will significantly improve.

Your debt utilization score has a 30% weighting on your credit score, which is 3 times more beneficial than the 10% weighting a new credit inquiry has on your credit score. 

This means that you will initially have a small negative score impact from the new credit inquiry. However, as long as you don’t increase your spending and meet your monthly payments on time, the beneficial impact from your debt utilization score increase will be larger than the credit inquiry impact.

People with weaker starting credit scores should not open a new unsecured credit card in hopes of improving their debt utilization score. Their best option would to open a secured credit card rather than a regular credit card.

By only utilizing a small portion of your secured credit limit and consistently meeting your monthly payments on time, people with weaker starting credit scores will start to notice a steady improvement in their credit score.

Consumers have limited recourse against Credit Card Companies

When you open a new credit card, all the major credit card companies require you to agree to binding arbitration which restricts your ability to hold credit card companies accountable in the legal system.

What many people don’t realize is that the newly created Consumer Financial Protection Bureau provides consumers with the ability to file complaints against credit card companies.  Credit card companies don’t want you to know about this because they are required to respond directly to any complaints filed with the CFPB. 

This doesn’t mean that any compliant will be resolved in your favor.  But it does mean that if you feel like you were treated unfairly, you will get the ability to state your case and have it evaluated fairly. 

Your Credit Score is an Accurate Reflection of your Credit History

Many people falsely believe their credit scores are an accurate representation of their past credit history. 

Unfortunately, this is not always true.  The Federal Trade Commission found that as many as 20% of consumers have errors on their credit reports.  These errors can range from minor address mistakes to more significant late or missed payment mistakes.

The three major credit rating agencies have an online system for correcting any credit report errors on your account.  By submitting any errors to these agencies, the appropriate corrections can be made.  In many cases this will result in an immediate increase in your personal credit score as well.

Opening a New Credit Card Negatively Impacts your Credit Score

This is a great example of a myth that is based on accurate information, but doesn’t tell the full story. 

In simple terms, opening a new credit card does negatively impact your credit score.  This happens because requesting a new credit card requires the issuing credit card company to complete a credit inquiry before they can approve you for a new credit card.

A credit inquiry is simply a credit check used to evaluate your ability to repay additional debt.  What is important to understand is that a credit inquiry only represents 10% of your overall credit score. 

Factors including your payment history (35% weighting), credit utilization (30%), and your length of credit history (15%) account for a much larger weighting of your credit score. 

So while opening a new credit card will result in a negative impact to your credit score, the impact is really much lower than some of the other more important credit metrics.  This means that you shouldn’t be afraid to open a new cell phone plan or complete a general financial transaction that requires a personal credit inquiry because it will only have a small negative impact on your credit score.

Soft vs Hard Credit Inquiries

When thinking about credit inquires, its also important to distinguish between soft and hard credit checks.

A soft credit check occurs when you’re trying to get pre-approved for a mortgage or an auto loan. Soft credit checks can not be seen by anyone other than you and do not directly effect your credit score.

The key factor for determining if a credit inquiry is a soft credit check is whether or not it was directly related to an application for a new credit product.

A hard credit check is a credit inquiry that is directly related to a lender approving you for new credit. These credit inquires can be seen by other lenders and will remain part of your credit score for two years.

The key is to not go overboard with new credit inquiries. An excessive amount of hard credit inquiries will negatively impact your credit score. However, periodic inquiries are considered normal and do not have a meaningful impact on your score.

Final Thoughts

When you understand how your credit score is calculated, it can be much easier to take action to positively impact your personal score. I hope by pulling back the curtain on a few popular credit score myths, you’ll have an easier time understanding how to make your credit score work in your favor.

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