Myth: The FICO score is the only credit score that matters
Fact: The FICO credit score has been around for nearly three decades and is the most widely used credit score by lenders today. If you apply for a mortgage, the bank will almost certainly use your FICO score to vet you.
But for other types of loans — from credit cards to auto financing — there are thousands of other credit scores you may not realize exist. Banks are constantly tweaking and customizing credit scores to suit their own needs.
For example, the amount of money you are able to put down on a car may factor into a custom credit score used by an auto lender. Credit card companies may calculate different scores depending on whether you applied via direct mail or the Internet.
Even your FICO score can vary from lender to lender. That’s because each bank uses information from one or more of the three major credit bureaus (Equifax, Experian, or Transunion) to calculate your score. Depending on which credit report they use, your score may be different.
Myth: Credit scores measure how rich or poor you are
Fact: Credit scores are not used to predict how rich or poor you are. The point of credit scores is to measure how likely you are to be able to repay a loan. When banks and other lenders are trying to figure out whether or not to approve you for a loan, they rely heavily on credit scores. That makes healthy credit vital if you want access to financing. But it is not a financial health score.
You also don’t have to be filthy rich to have a stellar credit score. So long as you use credit wisely — pay on time each month, keep your balances low, etc. — you can have excellent credit no matter how much you earn.
Myth: Carrying a credit card balance boosts your score
Fact: The best way to earn a healthy credit score is by keeping your utilization low. Carrying a balance won’t necessarily hurt your score, so long as you are using less than 30% of your total available credit limit across all your credit card accounts. For example, if you have a credit card with a $1,000 limit, then you should spend no more than $300 a month on the card.
But, remember: By carrying a balance, you risk getting hit with interest charges. To avoid those charges, pay your card in full each month.
Myth: Paying of a debt in collections is the best way to boost your score
Fact: Once a collection item hits your credit score, the damage is done. With your FICO score, the only thing that can heal your score is time. Otherwise, nothing improves your score more than paying and keeping your open accounts current.
For that reason, it’s not wise to skip payments on existing debts in order to resolve debts that are in collections. Stay focused on paying your current debts, which can prevent any more negative information from entering your report.
That being said, it can be overwhelming to focus on current debts when debt collectors are constantly pursuing you for old debts. There are steps you can take to stave off contact from collections agencies.
Myth: My partner’s score is great, so mine doesn’t matter.
Fact: You and your partner might share finances, but that doesn’t mean you share a credit score. This could be good news or bad news. If you’ve got bad credit, your partner’s excellent score will do nothing to give you a boost. But if you’re the one with good credit, your partner’s crummy score won’t hurt you.
There’s an exception, however: If you apply for a mortgage loan together, the lender will look at both scores. In that case, it’s important to work together to improve your scores before you take on a joint loan.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.