3 Myths About Your Credit Report

There are many myths regarding what affects your credit report, how often you can check it, why it is important to have a good score and what it really all means. Additionally, many people have these conversations based on hearsay without really knowing the facts pertaining to credit reports.

Well, we are here to lay it down for you. We’ll separate the myths from the truth so that by the end of this post, you’ll know where you stand with your own credit report.

The Myths

There are always going to be misconceptions about credit scores. But ultimately, it is important to know what they are. While there are certainly too many to mention here, these are three of the most common myths related to credit reports:

“Your credit report is an entire history, not a snapshot.”

1. Once debts are cleared the report will be perfect:

Sadly, this is not the case. Certainly your credit report will improve after you pay off your debts, but not instantly. As noted by Bankrate, your credit report is a collection of your payments – an entire history – not just a snapshot. Only by consistently staying on top of your payments and keeping your debt low will your credit report get to the place you want it.

2. Education level plays a factor in setting your score:

Not even a little bit. Perhaps someone with little education who also had a bad credit score blamed one on the other at some point, but they are not related. Your credit report is a historical account of your debt-related information, which means factors like education level aren’t considered.

3. Divorce plays no role in your credit report:

While the act of divorcing your spouse does not itself have a relation to credit reports, it can have indirect effects. For example, a couple may have a credit card they both share, and according to Experian, an information services company, closing this account, or removing yourself from it, will affect your score. Canceling credit cards is not a good idea regarding your credit report, and closing one out because of a divorce is a comparable action. This doesn’t mean a divorce will automatically impact your report in a negative way, but it will certainly play a role in adjusting your score.

The Truths

There are realities about credit reports that you should know as well. Here are a few truths that everyone should know about credit reports:

1. There is more than one credit score:

This seems odd to some people, but it’s the truth. FICO is not the only scoring company (and it is that, a brand, not a government agency, which is another common myth). In fact, as Ken Lin, founder and CEO of Credit Karma, noted in a feature piece in Inc. Magazine, there are more than 50 scoring brands in the U.S. This doesn’t mean your score will be radically different from one company to another, and that you can just find one you prefer. While there are different scores, they will all be relatively similar.

2. A solid score doesn’t guarantee you anything:

Just because you have a high credit score on your report doesn’t mean you are in the clear. Lenders have their own methods for assessing risk in a borrower. Even if your credit report seems flawless to you, lenders might have specifications like a minimum salary or job length requirement. But don’t think for a second this means that having an impressive credit report is not important.

3. Using credit is necessary: 

It may seem like a Catch-22, but you must use your credit card and pay down debt to build your score. If you think you can have a perfect credit report by simply paying cash, then you have no recent history of credit, and this will not improve your score. Remember, a report considers all of your credit-based spending, so just use credit responsibly and you will be able to strengthen your report.

The Tips

Having a solid credit report is beneficial for your financial future, making it easier to be accepted for loans no matter what you are securing funding for. Here are three tips for building your credit:

1. Pay your complete monthly balance:

You should only be using your credit for items you can afford. It all comes down to being realistic in your approach. Have a budget for your credit spending so you know you can pay it off every month. This will demonstrate healthy spending activity on your card, which is what lenders like to see.

“When it comes to credit, use it, don’t abuse it.”

2. Know where you stand:

Don’t just assume you have good credit. Likewise, don’t procrastinate on applying for a loan because you think you have work to do repairing your score. Go find out for yourself where you stand by requesting your credit report. Credit.com noted that knowing your score is different than assuming. While this may sound obvious, it is important because your guess might be off by more than you realize. It is worth learning your score rather than just making the assumption.

3. Don’t accrue a large balance:

You may think that having a large balance is fine as long as you pay the minimum. The important factor to consider when carrying around a hefty balance is what lenders will think, as noted by Credit Karma. If you have a large balance, even if you are making your payments, lenders will think you are reliant on your credit, which is not where you want to be.

Credit is important as it allows you leeway in your lifestyle and assists you in achieving your financial goals. But going about it the wrong way can put you in a situation you don’t want to be in. Use your credit report as a guide to see where you stand and how you can improve your overall credit.