The credit scoring model is commonly misunderstood by many consumers.  Most have very limited knowledge about what actions can effectively boost or damage your score, and how your credit score affects your ability to make big financial endeavors. As a result of unfamiliarity, the consumers’ ratings remain low as they struggle to make payments on balances with high interest rates. After years of our work in the industry it’s become easy to identify the most popular misconceptions and myths regarding credit scores- listed below are the most common misconceptions about credit scores.

Checking Your Credit Report Hurts Your Score

Up to 10% of your total credit score is determined by the pursuit of new credit, typically it is measured by inquiries made on your credit score over the prior two years. However, it is essential to know that not all inquiries are the same. Inquiries related to applying for a new line of credit are considered a “hard inquiry” on your credit report. These are the inquiries that affect your credit score. Any other inquiry is considered a “soft inquiry” and has no impact on your score. Examples of soft inquiries include those that you initiate yourself, credit updates by banks with existing accounts and credit inquiries used to market new credit products to you.  

Opening a New Credit Card Will Lower Your Score

It's true that a new card will lower your score- but only temporarily. In the long term it will likely to have a positive effect on it. New credit reduces both your credit score and your average age of credit. As the account ages,  the average account age steadily improves. Additionally, having a larger number of open accounts that are up to date and well-managed shows lenders that you are a responsible borrower, posing lesser risk on defaulting payments.  

Lenders use Only One Credit Score Upon Application

It is a fact that the vast majority of lenders use the FICO credit scoring model to assess you as a borrower, however the lender is always aware that there is more than just a single credit score that is associated with your name. A FICO score is generated by all three of the major credit bureaus: Equifax, Experian, and TransUnion. Additionally, the FICO formula has been updated several times. As if that weren't enough, there are also industry-specific credit score evaluation models as well, such as auto- and credit card-targeted FICO scores. In all, there are up to 28 different FICO score modules a lender could potentially utilize when you apply for credit.  

Limited Use of Credit Cards can Help your Credit Score

Despite this popular misconception, avoiding credit cards altogether isn't likely to boost your credit score at all. Ultimately, if you have a mortgage and an auto loan, if you maintain fantastic payment histories, then it's ultimately easy to build a strong credit score without the use of credit cards. However, completely or partially avoiding the use of credit cards can hurt your score in a multiple ways. A total 10% of your score comes from your "credit mix" which can be boosted by having several different types of credit accounts. That said, 30% of your score comes from "amounts owed" which includes, the total amount of debt, your credit utilization ratio, and the percentage of your available credit remaining. If you don't have any open revolving credit lines, your score will unfortunately not improve.

Overdraft has a Negative Impact on Your Credit Score

To a lender an over-drafted account shows that you've been irresponsible with your bank account, but it doesn't affect your credit in any way. Your credit report is only made up of information from credit-related activities. Examples include: credit cards, student loans, auto loans, collections, mortgages and line of credit, those are the most common accounts on a credit report. Anything related to checking, savings and other non-credit accounts should never appear on your credit report or affect your credit score.  

Closing an Unused Credit Card will Boost my Score

This is one of the most common misconceptions. Many consumers believe that it increases your ability to borrow money, which in turn makes you less of a risk factor. In reality, your credit utilization is a big factor in your overall credit score. It decreases the amount of credit available to you in relation to the balances you owe. The higher this ratio is, the lower your score will be. Even if you don’t use your credit cards, the account history remains on your report. Together, good payment record and the length of time accounts have been opened contribute to a large percentage of your credit score. Leaving those accounts open improves your rating over a period of time.  

A Word of Advice

Scores update every 30 days and reflect your activity during that time frame. If you make payments on time and do not use any new credit, your number has a potential to increase by as much as 20 points in just three months. Your credit report and credit score are two of the most important tools a consumer can have to manage all personal finances. To achieve the best results, think ahead before making any decisions that could impact your credit.