Your credit score, an assessment of your creditworthiness, can also affect the rate you pay for insurance, your cell phone plan, and even your ability to land certain types of jobs.
But despite the importance of credit scores, they remain largely misunderstood. Here is an overview of several common misconceptions.
#1: Having a credit card balance will improve your score
“You don’t want to have a balance because it just increases your utilization rate,” said Jirayr R. Kembikian, certified financial planner at Citrine Capital.
#2: There is only one credit score
Although FICO is the most popular score provider, different types of lenders use different versions of the score. Additionally, a growing number of lenders are working with FICO competitors, such as VantageScore.
“There are many, many different credit scores, and the score you just saw may not be the same score lenders see when they review your creditworthiness,” said Matt Schulz, chief analyst credit at LendingTree.
Even though the scores are slightly different, they should point in the same direction, Schulz added. So if one score drops significantly and the other doesn’t, it could indicate an error or some other problem in one of your credit reports.
#3: It costs money to check your credit
“One of the best ways to improve your credit score is to fix errors on your credit report,” Schulz said. “People would be surprised how often errors occur.”
Credit reports don’t include your score, but you can still access some scores for free through websites like LendingTree and Credit Karma, or through your credit card issuer.
#4: Closing your old credit cards can increase your score
The length of your credit history is another factor that goes into your credit score. So keeping your oldest cards open and using them occasionally (and paying for them) helps rather than hurts your score.
Similarly, closing an account will damage your score.
#5: Your spouse’s score can impact yours
Credit scores are for individuals, not couples. While lenders will look at both of your scores if you’re applying for a joint credit card or mortgage, your scores are separate. So if your spouse has a low score, it won’t affect the credit you apply for on your own behalf.
#6: Opening a new card will hurt your credit
Any new credit, including credit cards, will cause your credit to decline in the short term, but it won’t affect your score in the long term. It’s the investigation by the new lender that will likely take a few points off your score, but if you have good credit, it should recover quickly.
“If you have several years of good credit behind you, you don’t have to worry about opening a new card, as long as you don’t plan on getting a mortgage within the next few months,” Pritchard said.
#7: Higher income means higher score
Although lenders consider your income when deciding how big a loan to give you, the amount of money you earn is not a factor that credit agencies use to determine your score.
“You can have someone with a lower income and a great credit rating, and you can also have the opposite – someone with a very high income and a terrible rating,” Kembikian said.
#8: Co-signing a loan won’t affect your credit
From the point of view of a credit agency, co-signing a loan is like taking out a loan on your own. This loan balance will affect your credit utilization rate and late payments will hurt your credit score.
“If the person you’re co-signing for isn’t responsible and doesn’t pay their debt, for whatever reason, it can have a gigantic negative impact on your credit score,” Kembekian said.