9 Myths About How Your Credit Score is Calculated

July 5, 2019
How Your Credit Score is Calculated
How Your Credit Score is Calculated

Under most scoring models, credit scores (also known as a FICO score) range from 300 to 850. The higher the number, the better a person’s credit – it implies that the person is a lower risk to a lender.

Your credit score is based on your credit report, which tracks current and past debts and payment history.

It not only influences loan approval but also determines the interest rate you’ll pay.

Following are many myths that people tend to believe about their scores.

Myth 1: The Credit Bureaus Decide Whether I Get a Loan

The three credit bureaus, Experian, Equifax, and TransUnion, generate credit reports but don’t determine your credit score or advise lenders on loan approvals. They present facts about your credit history, such as whether you pay debts on time. Companies like FICO and VantageScore Solutions calculate your actual credit score. However, these bureaus assess your credit risk based on your credit report.

Myth 2: There’s Only One Type of Credit Score

There are actually many different scores. For example, FICO has several models with varying score ranges that a lender can use. Thus, the FICO score attained by one lender may not be the same score received by another. If a lender declines your application or charges you a higher interest rate because of your score, determine what in your credit history may be negatively impacting your score and work towards resolving those issues. You can request a free copy of your credit report every 12 months from each of the three credit bureaus.

Myth 3: Closing a credit card removes its age from your credit score.

If you’ve got a card that has always been in good standing on your credit report, it might be best to leave it open. As long as the card remains on a credit report, the credit scoring system will continue to see it and still consider the card in the scoring metric—regardless of its age or standing.

Myth 4: A Credit Card Stops Aging the Day I Close it

Even after closing an account, a credit card will age and impact your credit score, regardless of its standing. However, a closed account will not remain on your credit report forever. The credit bureaus will delete them after 10 years if the account was in good standing, and after 7 years if the account had a damaging history.

Myth 5: I Need to Carry Debt to Build Credit

Not necessarily. It’s all about balance. Making minimum payments and maxing out your credit cards is detrimental to your credit score. It’s also a fast-track to needing credit card help. You’re better off having credit cards that are no more than 30% full to show that you can have credit without using it.

Myth 6: Medical Debt is Treated Differently on Credit Reports

Typically, medical bills aren’t reported to a bureau unless sent to a collection agency. If reported, credit bureaus treat them like other debts. The more recent they are, the more they can affect your credit score.

Myth 7: A Credit Repair Company can only Remove Inaccuracies on My Credit Report

Credit Repair Companies can help provide advice and assistance in reporting inaccurate information on a person’s credit report. If negative information on a credit report is accurate, it will take at least 7 years to be removed, regardless of the Credit Repair company.

Myth 8: My (Credit) Utilization Ratio Doesn’t Matter

Your credit utilization is the percentage of your available credit that you’ve used. For example, if your credit limit is $1,000 and you’ve charged $250, your utilization ratio is 25%.

This ratio plays a key role in the credit scoring system and can quickly impact your credit score, positively or negatively.

The credit score tracking website CreditKarma.com recommends that consumers shouldn’t exceed utilizing 30% of their available credit. If all your cards are maxed out, you should look into how to pay off credit cards immediately.

Myth 9: I Should Avoid Getting Store Credit Cards Because They’ll Hurt My Score

Using a store credit card responsibly can raise your credit limit, improve your utilization rate, and boost your score. It may also be a good option for those who might not qualify for other types of cards.