Credit

6 Credit Myths That Refuse to Die

6 Credit Myths That Refuse to Die :: Mint.com/blog

When it comes to maintaining healthy credit, what you don’t know can actually hurt you.

Here are 6 credit myths that refuse to die:

Myth #1: Closing an old credit card will cause your score to go down because you lose the value of the age of the card in your credit scores.

Fact: Your credit scores still consider the age of your credit card accounts even if they’ve been closed.

This myth has gained momentum over the past few years and is close to catching “credit scores are used by employers” as the most common credit myth spread by those who are not in the know.

Not only do closed credit cards still factor in the age related metrics of your credit scores, but they even continue to age after they’ve been closed.

A 10-year old credit card will be an 11 year old credit card the same time next year.

Myth #2: The credit rating agencies sell your credit reports to lenders.

Fact: A credit rating agency is not the same as a credit reporting agency.

Credit rating agencies grade debt obligations such as corporate bonds or mortgage backed securities. They do NOT grade the grade individual consumers.

Moody’s Investors Service, Standard, and Poor’s and Fitch Ratings are the big three credit rating agencies.

Credit REPORTING agencies, on the other hand, do grade the risk of individual consumers. That’s what a credit score does.

Equifax, Experian, and TransUnion are credit reporting agencies, not credit rating agencies.

Myth #3: Credit scores and credit reports are the same thing.

Fact: Credit reports and credit scores are not at all the same thing, but people use the two terms interchangeably as if they were and that’s where many errors are made.

A credit report is simply a collection of information about a consumer including your personal identifying information, your liabilities, some financial-related public records, 3rd party collection accounts, and inquiries into your credit report.

A credit score is a numeric grade based on most of that information (all but the personal info). A credit score is a product sold along with a credit report, but it is not a part of your credit report.

Myth #4: You have a credit score.

Fact: You have countless credit scores.

There are two credit scoring models that are the most commonly used by lenders: the FICO credit score and the VantageScore credit score.

You have over 50 different FICO credit scores because there are over 50 FICO scoring models commercially available today, and there are three versions of the VantageScore credit score commercially available today.

We’re actually just scratching the surface because there are many other scoring models used by lenders to predict risk, the likelihood of you filing bankruptcy, whether you’ll respond to a credit card offer, whether you’ll stop using their credit card, whether you’ll be an unacceptable insurance risk, and whether or not you’ll be a profitable customer.

You have hundreds of scores, not just one score.

Myth #5: Credit scores punish you for not having any debt.

Fact: Credit scores reward you, significantly, for not having any debt.

I know most of the aforementioned myths are spread by accident, but not this one.

This one is intentionally spread by credit card haters and credit score haters.

The truth of the matter is that there are several measurements in credit scoring systems that punish you for having debt, having debt that’s too close to your credit limits or loan amounts, having too many accounts with balances, and having past due balances.

Myth #6: Credit scores are used by employers as part of employment screening.

Fact: Not only are credit scores not used by employers, but they aren’t even available to employers.

We can blame this one on myth number 3 above.

Credit REPORTS can be used for employment screening purposes and since many people think credit reports and credit scores are the same thing, we see many articles and news stories suggesting that your FICO or VantageScore credit scores can disqualify you for a job.

This myth is so stubborn that lawmakers have even proposed legislation to outlaw the use of credit scores in the employment screening processes.

John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.