By Charmaine Ng, Communications Coordinator at Credit Karma
I didn't know credit scores existed growing up. I didn't even open a credit card until the middle of my college years. When a friend opened her first card sophomore year of high school (at her grandmother's behest), I scoffed and laughed.
Suffice it to say, I've learned a lot since joining the Credit Karma ranks last February. I'm here today to dispel some of the most common myths about credit. I'm sure you've wondered about them too, so check out some answers to common credit myths below.
Carrying a credit card balance will help your score.
This is completely untrue. The only thing carrying a balance from month-to-month will do is lead to unnecessary interest charges and potentially raise your rates. You don't need to carry a balance to demonstrate credit activity to the bureaus. You could charge 25 percent of your credit card limit in a month and pay off the full balance over the next month, and your lender would still report a 25 percent credit card utilization. So don't go out of your way to carry a balance just to improve your credit score.
Your income affects your score.
False. In fact, your income isn't even reported to the credit bureaus. Your employer doesn't send over your paycheck information, and your banks don't pass on details about your checking or savings accounts. One could argue that your income affects your score in that having more disposable income allows you to pay off your debts quicker and take care of your bills sooner - but the fact remains that credit bureaus don't report on income levels.
Credit reports are always accurate, so you don't need to check yours.
In a 2013 study, the Federal Trade Commission found that one in four consumers had errors on their credit reports that might affect their scores. Isn't that scary? Information can vary between bureaus due to clerical errors and result in mistakes such as missing payment history or collections accounts that don't belong to you. These errors could negatively impact your score, as well as your chances of being approved for a new line of credit. That's why it's so important to check your credit regularly by signing up for a free monitoring service and pulling your full credit reports. You never know what errors may be lurking out there, so be proactive, check your credit and dispute any mistakes.
There's no difference between a credit score and a credit report.
People often use these terms interchangeably. Both your credit score and your credit report can be used by lenders to judge the amount of risk you pose as a borrower, but the two take different forms. A credit score is a three-digit number that quantifies your credit worthiness. Credit bureaus determine your score based on several key factors, like your payment history and derogatory marks. A credit report, on the other hand, is a detailed listing of your credit history, containing information like your account details, public records and hard inquiries.
When you pull your free credit report from sites like AnnualCreditReport.com, you won't receive your credit score alongside your credit report because they're technically two different products. If you're interested in receiving both at the same time, however, you can do so by accessing your TransUnion credit report through Credit Karma.
You only have one credit score.
The leading myth of them all. No matter how many times we try to spread the word, this myth just won't die.
You actually have many more than just one credit score. Each credit bureau has their own proprietary scoring model (TransUnion details theirs here), and within each bureau, there could be dozens of different models used for various purposes.
FICO also uses multiple models. Back in March, FICO announced they were releasing FICO Score 9, the latest in a long series of scoring models, this summer. However, they also plan on issuing industry-specific scores for credit cards, auto loans and mortgages.
Think about it this way. A mortgage lender is going to value aspects of your credit history differently than a credit card lender will. The process to open a mortgage is infinitely more complicated and requires heavier vetting of your financial background, so they'll use a scoring model that specifically targets what they're looking for.
Say your lender chose to use the VantageScore, which was created by the three major credit bureaus. The most recent version of the VantageScore is 3.0, but lenders could still use prior versions, meaning that even if you see one credit score on your billing statement, you could easily see another somewhere else. This can definitely be frustrating, but that's why it can be helpful to track the change in your credit scores over time, rather than zeroing in on one specific number at one specific moment.
There you have it. Your income isn't factored into your credit score, and you don't need to maintain a balance from month to month. Checking your credit report for errors is crucial, credit scores and credit reports aren't the same thing and you most definitely have more than one credit score in existence.
If any of this was news to you, do your part in squashing these myths. Help us enlighten your friends and family, and pass this along!
About the Author: Charmaine Ng is the Communications Coordinator at Credit Karma. When she isn't writing her way through life, you can find her reading about the latest in entertainment and watching television almost every night of the week. Say "hi" @noodlemaine!