5 Credit Score Misconceptions
Credit Knowledge Begins With Dispelling Certain Credit Myths
Let’s start with the misconception about what constitutes a “good credit score.”
Misconception No. 1: A credit score of 600 is good.
“In no universe is 600 a good score,”
But yet about one in five Americans think that a credit score above 600 will qualify a person for any credit card. It won’t. Credit scores generally range from 300 to 850; a score of 600 is actually below average.
A score of 600 is “going to make it really hard to get credit, and if you do get credit, you’re going to pay a lot for it,” Sukhu said. “In most of the formulas, you’re going to want above 700, ideally above 750.”
A score of 600 “unlocks department credit cards, which will qualify people at the lower end of the credit score. But those credit cards have annual percentage rates in the high 20s to low 30s.
Once you’re in the 700 club, you start to unlock the top-tier financial products, Sukhu said. And top-tier financial products mean you can borrow money for less and make your life far less expensive.
Misconception No. 2: You start off with perfect credit score.
Eleven percent of Americans think people start off with a perfect credit score, according to y2kcreditsolutions.
“It’s something you build from scratch,” Sukhu said. “It takes a while to build your credit over time, but you can really trash it overnight.”
That doesn’t mean you start at a zero credit score, however.
“You start with no information. You would really be referred to as having no credit history, or having a thin file, and from there you work way up..
Misconception No. 3: Carrying a balance on your credit card improves your credit score.
Again, no. Carrying a balance does not improve your credit score. Yet, two in five Americans think just that.
“There’s no upside to carrying a balance. Basically, you’re paying interest for no good reason.”
“That one we’ve been beating our heads over for decades,” Sukhu said. “There’s no upside to carrying a balance. Basically, you’re paying interest for no good reason.”
To build your score, continue to use your card lightly, but regularly, Sukhu said.
There never was a good reason to carry debt on your credit cards, but today there’s a good reason not to.
People who pay their balances in full are considered a lower risk for lenders than those who don’t.
“Fannie Mae and Freddie Mac told mortgage lenders that if this data is available, you should use it,” Sukhu said. In fact, paying off your balance every month just might put you over the edge in the eyes of a lender when it comes to getting approved for a mortgage.
Misconception No. 4: Checking your credit score hurts your credit report.
It does not. But this misconception might explain why 12 percent of Americans have never checked their scores.
There are two types of inquiries into your credit report: a hard pull, done by banks when you apply for credit, and a soft pull, which happens when you check your credit score.
The soft pull this is displayed by you Credit Card or Credit Karma is not accurate either. Those sites are set up to merely let you know if anyone is using your Social Security number to open fraudulent accounts in your name.
Consumers are allowed 6 inquires a 12 month calendar year, Any more than that will be abuse of credit and will drop your scores. So, pull your credit wisely!
Misconception No. 5: You should spend close to your credit limit.
“There’s a myth that it shows more responsibility to run up your card and then pay it off,” Sukhu said.
“What we tell people is 30 percent or less is good, 20 percent or less is better, 10 percent or less is best.”
It’s quite the opposite. You want to keep your credit utilization low.
“The credit score formulas like to see a big gap between what you’re using and what you’re allowed to use,” Sukhu said. “What we tell people is 30 percent or less is good, 20 percent or less is better, 10 percent or less is best.”
The two big factors that make up your credit card score are:
1. Payment history. (Do you make payments on time?)
2. Utilization. (How much credit do you use that is available to you?).
“These two factors make up 65 percent of your credit score,” Sukhu said. Of the five factors used to determine credit scores, these are the two consumers should worry about.
Sukhu also suggests new credit card users be cognizant of their spending. If your credit limit is low, say at $1,000, spending just $300 will put you at your 30 percent utilization rate before you know it.
Have questions? Need help managing your credit? Let’s talk!
Call Y2K Credit Solutions at (877) 552-1377.