Four Common Myths about Credit Score
There is a ton of information (and bad advice) about credit on the internet. It can be hard for even the savviest researchers to figure out what information to take to heart. Credit-building is big business, and industries sponsor much of the information on the web to increase their profits, not just to improve your financial well-being.
Dan and I talked all things credit repair, including some major myths around credit and how busting them can empower you to protect, repair, and improve your credit score.
Myth #1 Credit Karma gives an accurate representation of credit score.
Your Credit Karma “score” is not the same as your FICO score. The advice Credit Karma offers is for improving the Credit Karma score and may not have any effect on the FICO score.
For example, the Credit Karma score uses credit limit as a factor, whereas the FICO score does not. Credit Karma uses credit limit as a factor because they make money when a user takes their advice to increase credit limit by signing up for one of Credit Karma’s recommended cards.
For FICO scores, it’s credit utilization that matters. If your balance is $2,000 and your limit is $10,000, your credit utilization is 20%. While having a higher credit limit may help decrease your percent utilization, credit limit is not itself a factor for FICO scores.
Credit Karma can still be a good way to monitor your credit as a safety net against identity theft, but you should not consider your Credit Karma score indicative of their FICO score.
An excellent option for monitoring credit is AnnualCreditReport.com. It won’t give an actual score, but it will provide free reports every 12 months from all three bureaus. These reports will indicate if you have any discrepancies, late payments, or other negatives.
Myth #2: Just follow the 70-50-30 rule!
The 70-50-30 rule suggests that there are just four buckets of credit utilization and that your score will be impacted the same no matter where you fall within each bucket. If you are in the over 70% utilization bucket, your score will be most negatively impacted. If you are in the under 30% bucket, your score will be most positively impacted.
In reality, the buckets come in closer to 10% intervals. It is therefore worthwhile to decrease your credit utilization as much as possible. Even a 10% decrease could be beneficial to your score. Ideally, you should utilize less than 10% of your credit limit.
Myth #3: “I paid my collections, so I don’t need credit repair.”
Scores do not care if collections are paid or not. That doesn’t mean you shouldn’t pay your collections, but it does mean that if you have negatives on your report, you should speak to a credit repair specialist before making any payments.
Negative marks on a credit score stay for a maximum of seven years. They do not magically drop off just because they have been paid. That being said, nowhere in the law does it say that negatives must stay on a report for seven years, so a credit repair specialist may be able to help remove negatives sooner if they are inaccurate or unverifiable.
Myth #4: All credit repair services are created equal.
Here are three things to look for when selecting a credit repair specialist:
First, look for specialists who utilize a two-pronged approach, meaning they work to remove negatives on their end and also make recommendations for actionable steps you can take.
Second, look for specialists that give a concrete time-frame to the repair process (3-month program, 6-month program, etc.).
Third, all reputable credit repair specialists should do a free consultation to determine whether they can help you before signing you up for a program.
The Takeaway
Credit repair is an investment, not an expense. A higher credit score does not just mean lower mortgage interest rates. Credit score can affect everything from car loans to insurance premiums to utility deposits.
Managing credit should become a normal part of a routine, like going to the dentist. With a little knowledge and effort, you can have a lot more power over your score.