Your credit is important, but unfortunately, many people have a poor understanding of how credit actually works. This poor understanding of credit has led to a variety of myths surrounding credit scores and reports going around. Such myths can be dangerous, and they can even impact how you view your credit report. Here are just three of the top credit myths in existence.
Myth #1 – 30% of Your Credit Score is Determined by Your Revolving Utilization Ratio
The first myth has to do with your revolving utilization ratio of debt. According to the myth, the amount of debt you owe composes approximately 30% of your credit score. In mathematical terms, your revolving utilization ratio of debt, also known as your credit utilization ratio, is the amount of revolving credit used divided by the amount of revolving credit available. In its simplest terms, it is how much you owe divided by your overall credit limit expressed as a percentage. For example, if you have $20,000 available, and you currently have a balance of $10,000, your revolving utilization ratio will be 50% (you are using half of the credit available to you).
As previously implied, your credit utilization rate is calculated using only revolving credit – basically lines of credit and credit cards. This number does not include installment loans such as auto loans or mortgages. Revolving credit earned its name because it does not have a definite end date – the amount carried revolves from month to month and year to year. Each month, you have the option to borrow against the amount of credit you have left, repay it, or repay some of it and borrow against the amount of credit you have left again.
If your account is in good standing and you have yet to reach your available credit limit, you will be able to borrow with a line of credit or your credit card. If you do not pay the balance in full, you will accrue interest on each card or line of credit.
The myth is partially true – how much debt you owe does have an impact on your credit score, but in reality, a wide range of other factors impacting your credit score is just as important. Some of these factors include:
- The number of open accounts you have
- The total sum of debt from all of your credit accounts
- How much you owe on installment loans, such as student loans and auto loans
- The type of accounts you have open
Since there are so many factors that go into calculating a credit score, it is impossible for your revolving utilization ratio to be worth a third of your overall score.
Myth #2 – The Age of Older, Closed Credit Cards Will Not Impact Your Credit Score
As you probably already know, you do have the option to close any of your credit cards. Unfortunately, there is a myth that once you close a credit card, its age no longer has an impact on your credit score. The myth is untrue, and as a matter of fact, most financial professionals advise against closing your oldest credit card accounts. Doing so can result in you losing the benefits of the age of your cards. In general, the age of your credit accounts makes up approximately 15% of your credit score and it is directly related to your overall payment history. Once more, this is only part of the story.
When you close a credit card, you do not lose the benefits of the age of the card. Actually, the age of your cards will continue to increase and have an impact on your credit score even after they are closed. Unfortunately, closing a credit card does have its disadvantages. When you close a card, your overall credit limit will decrease, making your credit utilization ratio higher. This can cause your credit score to decrease over time.
Myth #3 – Employers Can Check Your Credit Score
There is a common myth that employers can check your credit score. This myth probably exists because employers may elect to check your credit reports, however, credit scores and credit reports are not identical. A credit report contains information regarding your credit accounts and your credit score is a three-digit numerical representation of how creditworthy you are from a lender’s perspective. The higher this score is, the more creditworthy you will be considered.
It is illegal for an employer to access your credit report in many states, and in other states, you must provide verbal or written permission for them to do so. Companies simply can’t go behind your back and pull your credit report. Also, the type of credit report your employer will receive will be slightly different from the one banks and other types of lenders receive. The credit report your employer receives will not have a score attached to it.
Don’t Believe the Credit Myths
As you can see, there are numerous myths associated with credit tradelines and credit scores. These myths are common, but they are not based on reality. To learn more about credit and its impact, contact Coast Tradelines today.