Credit scores facts in USA are really important. Something as vital as this should not be buried in falsehoods that might cost you money.
Allow us to go through the credit myths and save you millions of dollars.
Okay, perhaps not millions. However, believing urban legends regarding credit scores might cost ordinary Americans tens of thousands of dollars throughout their lifetime.
For example, have you avoided marriage because you don't want your future spouse's terrible credit to harm yours?
Get your feet going down the aisle!
There are plenty of reasons not to marry, but being married to a slacker with a credit score of 420 should not be one of them. His score has no bearing on yours and vice versa.
Credit Score Facts in USA
Every customer should understand that there are certain unavoidable truths concerning credit scores that they must be aware of. Most of them are obvious, but they might help you understand why you are - or are not - considered a good credit risk.
Credit Reports vs. Credit Scores Facts in USA
Credit reports and credit ratings are distinct but closely connected concepts. A credit report is a record of all activities that influence your creditworthiness, such as bill payments, loan applications, and divorce filings.
Credit bureaus process all of the data to provide a numerical rating. That is your credit rating. It's a sign of how well you manage your money, which is useful to know before you go house hunting, vehicle buying, or apply for a credit card.
In 2020, FICO will change its scoring formula to give greater weight to a consumer's personal loan history. It might have a detrimental impact on customers who have depended on such loans to pay off debt.
Credit Scores Facts in USA Are Based on Multiple Factors
Calculating your score is a mathematical calculation with several variables. It is based on five credit rating elements that have various degrees of influence:
Payment history- Accounts for 35% of your total score. It keeps track of your bills and when you pay them. Three pieces of advice: On. Time. Payment.
Credit usage accounts for 30% of your overall score. That is the amount of available credit that you use. For example, if your credit card has a $1,000 limit and you spend $500 this month, your usage is 50%. The scoring algorithm prefers that you maintain your credit usage below 30%.
Credit history length- 15% This merely displays the length of time you've been using credit and paying payments. The longer the period, the better because it provides credit bureaus with a greater understanding of how you conduct business.
New credit and inquiries- 10% That is when a potential lender will look at your credit report. There are two sorts of questions. When a financial organization (banks, credit card firms, mortgage brokers) requests your report, this is referred to as a "hard inquiry." These have a detrimental influence on your score.
A "soft inquiry" occurs when there is no actual money involved, such as when an employer conducts a background check, a utility provider opens a new account, or you are simply checking for yourself. These queries normally have little bearing on your overall score.
Credit diversification- 10% Mortgages, credit cards, vehicle loans, and utility bills are all examples of credit. The wider your portfolio, the better. Of course, as long as you pay all of your expenses on time.
A credit score fact that you should know: unpaid balances have a negative impact on credit scores.
Your payment history determines the majority of your credit score. A missed payment, regardless of the sum, can have serious and long-term effects on your credit score.
Credit Score Facts - Monitoring Fraud by Tracking Your Score
If your credit score does not appear to be right, you can verify your credit report for mistakes or fraud. Even if everything appears to be in order, it's a good idea to look through the list of transactions on a regular basis.
According to the Federal Trade Commission, one out of every five Americans has a credit report inaccuracy. A simple mistake is one thing, but if you become a victim of identity theft, you'll want to be aware of any bogus accounts as soon as possible.
Opening More Credit Cards Affects Your Score
Credit diversity is beneficial, but opening too many credit cards is a red indicator. Every time you apply for a new credit card, it counts as a "hard inquiry," and your credit score suffers as a result.
Retailers frequently entice customers with discounts if they acquire a credit card, but be aware of what you're entering into and the impact it will have on your credit score.
Keep your existing credit cards open if you open a new one. Closing old credit cards diminishes the duration of your credit history, which lowers your credit score.
Credit Score facts vs Myths
Here's what you heard in the beauty salon, barbershop, employee lunchroom, or wherever you receive your most untrustworthy gossip. Many are based on some truth, but embellishment pushes the narrative into the "wives' tale" category.
A Negative Credit Score Follows You Forever
Negative information on your credit record remains on your report for seven years, but, like athletes, its influence fades with age. So, if you started skipping payments when you were 21 but got your act together, purchased a house and a vehicle, and paid them off on time in your mid-40s, you won't be condemned eternally for your early transgressions.
Checking Your Credit Score Hurts Your Credit
Checking your own credit score is a "soft" query that has no effect on your credit score. As previously stated, frequent hard inquiries from financial companies researching whether to give you credit damage your score.
However, the impact is minimal, so don't let that deter you from qualifying for a home repair loan if your roof has recently caved in.
Rent Payments Help Raise Your Credit Score
Rental payments were traditionally not considered in credit scores, but new credit scoring models like FICO and VantageScore have begun to add rental data. The issue is that
1. Many lenders favor traditional scoring schemes.
2. According to FICO, fewer than 1% of rent payments are recorded to credit bureaus.
3. Rental payment data is generally utilized to enhance credit access for persons with no credit history, rather than to improve credit scores for those who already have a history of making credit card payments.
Landlords will almost never record positive rental payments for you. You can, however, employ services to record your own rental payment information.
Credit Scores Are Universal
That implies you have a single score that every lender looks at. That is partially correct. 90 percent of lending decisions are based on FICO ratings. The issue is that there are now ten FICO ratings, each with six or seven versions.
There are other scores computed by the three national credit agencies - Equifax, TransUnion, and Experian - each of which employs a similar but somewhat different process. In other words, if you have a negative credit score with one bureau, you will have a terrible credit score with all of them.
Your Credit Score Doesn’t Matter
If you think this, you've probably never tried to buy a house, a vehicle, insurance for either, or anything else on credit. Either that or you're so wealthy that you don't care what your score is!
A good credit score not only increases your chances of securing a loan, but it also implies a reduced interest rate. And if you don't think interest rates are important, talk to your accountant about it.
For example, if you took out a 30-year, $300,000 mortgage at 3.5% interest, your monthly payment (after taxes and insurance) would be $1,349. Your payment would be $1,613 if you had a 5.0% interest rate.
In practical terms, if you had a lower borrowing rate, you could buy 63 more Big Macs every month. Of course, if you did that, you'd probably die of heart disease before you paid off the loan. That is not something we recommend.
The Earth Is Flat
Huh? We're just checking in again to see whether you're still with us. Did you know that was a myth that was widely held until roughly 600 years ago? The majority of scientists thought the planet was round.
And, according to popular belief, Columbus did not travel to the New World to escape his wife's poor credit.