Forget everything you’ve heard about credit. Well, maybe not everything. “Living within your means” is always important, but you should be willing to rethink what you know. Because when it comes to debt, credit reports, and credit scores, conventional wisdom is peppered with myths, misunderstandings, and misrepresentations. Credit is a tool. Like any tool, it’s neither good nor bad in itself. What matters is how you use it.
Not all debts are equal. Say you’ve got a $150,000 debt on your credit report. If it’s there because you maxed out your credit cards to throw a birthday blowout for yourself two years ago, then you’re in trouble. Today, that debt is giving you nothing but memories (and maybe an ulcer). But if that $150,000 is your mortgage, then you’re probably just like millions of other responsible homeowners. That debt is giving you a warm place to lay your head at night.
A notation called an “inquiry” goes on your credit report every time someone (including you) looks at your file, and rumor has it that inquiries can hurt your score. Well, yes and no. An inquiry affects your score only if it’s related to a credit application that you have submitted. If you apply for a loan or a credit card, your score might fall, because that application suggests you’ll be adding debt. But if you simply look at your own credit report, the resulting inquiry won’t affect your score. If anything, checking your report is a sign of responsible credit management, though you don’t get points for doing it.
If you have a credit card you don’t use, you’re unlikely to improve your score by closing the account. In fact, closing the card might even lower your score. In general, credit scoring models don’t measure risk by how much credit you have available, but rather by how much of that credit you’re using – a ratio known as “credit utilization”. When you close an unused account, you reduce your total available credit, so your credit utilization goes up . (Of course, if an unused card creates an unbearable temptation to spend, you may be better served in the long run by closing the account.)
There isn’t just one single credit scoring formula that applies to all consumers in all situations. There are more than a thousand scoring models in use in the credit marketplace. A consumer could therefore have dozens or even hundreds of different credit scores. Lenders and others check your credit score for different reasons, and each formula looks at your credit history in a different way, giving different weight to various factors.
Credit bureaus collect information about your debts and use that information to assign you a credit score. Those scores are neither objectively “good” nor “bad.” They’re a measure of risk. It’s up to lenders to decide whether a given score meets their criteria for extending credit. And, scores are usually just one factor in their decision. A “good” score might not mean much if you don’t have a job or any assets. Likewise, a high income and a stack of gold bars might outweigh a “bad” score.
Your job title and income have no direct effect on your credit score. Scores are based only on the information found in your credit report. Your report includes a lot of information about your use of credit and your management of debt. But, it doesn’t include your income. In fact, it may not even indicate whether you have a job (nor will it tell you to get off the couch and get one). That said, your employment situation can affect your score indirectly, in terms of your ability to pay your debts. And when you apply for credit, lenders will probably ask about your income.
Just as credit reports don’t list your income, they also don’t provide much demographic information. Credit reports contain no information about such things as race, national origin, religion, profession, disabilities, sexual orientation or military veteran status. They also don’t say how much you have in the bank or in retirement accounts. And if it’s not on your credit report, it can’t affect your credit score.
There’s no such thing as a joint credit report – for married couples or anyone else. Married or single, you have your own credit report, one that’s linked to your Social Security number. If you’re married, you and your spouse may have a lot of joint accounts, such as mortgages, car loans and shared credit card accounts. Those joint items will appear on both your credit reports and will affect both of your scores. But your credit report is yours and yours alone.
Pay off a debt and you’ve eliminated your obligation – but the evidence of that debt can stick to your credit report for years. If you pay your debts on time and in full, you will likely want your paid-off accounts on your credit report because they show that you’ve used credit responsibly. If, on the other hand, you’ve been chronically late, missed payments or defaulted entirely, that’s a problem. Most negative information can remain on your report for up to seven years; some bankruptcies can stay there for up to 10 years.
There’s nothing that a “credit repair” company can do for you that you can’t do yourself. No one can remove accurate information from your credit report. Reputable credit reestablishing services can help you come up with a plan to repay your debts, but the only legitimate way to enhance your credit score is to practice good credit management.
Credit scores are designed to evaluate how big of a risk it would be to lend you money. That’s it. If your score is low, it’s because your credit history suggests that there’s a higher risk that you’ll default on a debt. It doesn’t mean anyone thinks you’re a bad person. Good, honest people can have low scores (and yes, truly awful people can have high scores). What you can do is work to generate a positive credit record: pay bills on time, reduce balances and apply for credit only when you need it.