I have received thousands of questions and comments about credit scores in my 20+ years of working in the credit scoring business—and I realize there are a lot of misconceptions about credit scores and lending practices. Here are several common credit score myths that I see repeatedly surface.
Myth #1: Every inquiry for credit costs 5 points.
Fact: There is no fixed set number of points that an inquiry will cost. Generally speaking, inquires have a relatively minor contribution to the overall score.
Myth #2: Part of my credit score is calculated based on where I live.
Fact: Credit score calculations do not factor in where you live (city or zip code, for example). Effectively managing your credit, on the other hand, will result in a higher score—regardless of whether you live in Beverly Hills, Calif. or Zanesville, Ohio.
Myth #3: A bankruptcy will haunt my score forever.
Fact: While most negative information must be removed from your credit report after seven years, the Fair Credit Reporting Act allows bankruptcy to be listed on your credit report for up to ten years. It’s true a bankruptcy will negatively affect your score, though the impact on your score lessens over time as the bankruptcy ages.
Myth #4: A short sale has less of an impact on a score than a foreclosure.
Fact: The presence of either a foreclosure or short sale information on a credit bureau report is considered negative by credit scores, as it is predictive of future credit risk. Generally speaking, both will have a similar impact on a score.
Myth #5: Making a lot of money results in a higher score.
Fact: Your income does not have a direct impact on credit bureau scores, as your income information is not recorded on your credit report. The score focuses on how you manage your credit—not on how you could manage your credit given your income.
Myth #6: Going to a credit counseling agency will hurt my score.
Fact: Not true. An indication that you are working with a professional credit counselor will not, in and of itself, hurt the score. However, negotiated settlements on balances owed with your creditors may affect your score if the lender reports it as such.
Myth #7: Carrying smaller balances on several credit cards is better than having a large balance on just one card.
Fact: Not always. A credit score will often consider the number of accounts or credit cards you carry that have a balance, in addition to your overall utilization of available credit. Thus, you may lose points for having a higher number of accounts with balances.
Myth #8: 850 is the perfect score.
Fact: While 850 may be the highest FICO score, it is not a “perfect” score. The “perfect score” is what a lender requires to approve you for the credit & credit terms you are seeking.