Credit scores are complicated, and some people mix you up on purpose. We break it down for you in plain English

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Online “experts” have tons of different takes on how your credit works. Some say you should stay in debt to get good credit — others say credit works the same for everyone.

But you should take these extremes with a grain of salt. What people take as truth are often just half-truths, lies, or, frankly, delusions.

Here we break down 10 popular myths about your credit score and explain how it really works…

1. “Credit scores and reports are the same thing”

This is a half-truth.

Credit scores and credit reports are closely related, and credit reporting agencies will bundle them together – to make more money off you. Here’s an example…

Equifax offers a $40 package that provides a “3-Bureau Credit Report with scores that reflects your entire credit profile in a simple, consolidated view.”[1] But you can get most of this information for free.

The reality: Credit reports and credit scores are mostly the same thing in a different format – like water and ice. Reports are most useful for consumers, and scores are most useful for lenders. The big differences between a credit report and a credit score are cost and transparency…

  • A credit report documents your credit history, including credit accounts with your borrowing limit or loan amount, the account balance, and whether you make payments on time. It also includes requests for credit and information on accounts in collection, bankruptcies, and foreclosures. You can get these free every year, and you can review and report any errors you find.
  • A credit score is a numerical summary of all the information in the report, and it’s derived using a semi-secret formula that varies over time and between credit bureaus. You can get a ballpark estimate of your score by knowing what’s in your report.[2] You usually pay for a peek at your scores, with a few exceptions. In 2013, First National Bank of Omaha and Barclaycard U.S. became the first to offer customers truly free credit scores, according to CNN Money.[3] And now, anyone can check out their FICO credit score for free using Discover Credit Scorecard, regardless if you’re a Discover member.

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2. “You have to pay for a credit report”

This is a lie.

It’s a deliberate deception peddled by the credit bureaus themselves. Go to any of their websites – Equifax,[4] Experian, [5] or TransUnion[6] and you’ll find them trying to sell you a report (sometimes bundled with something else like a score or credit monitoring) for anywhere from $1 to $50.

The reality: You can start with the free stuff and then decide if you need anything else. And while the credit bureaus sometimes tout “free” credit reports, they’re really just free trials to monthly subscription services.

But the credit bureaus don’t exactly highlight the fact each of them owes you a free, no-strings-attached report every 12 months. (All three have a tiny link at the bottom of the homepage alluding to it.) The federal government forces them to do it.

The official website to get your free credit reports from all three credit bureaus is[7] Make sure you get that name down, because there are a lot of fakes that try to charge you., for instance, is run by Experian and claims the free report can take up to two days to arrive. The paid version is, of course, instant. What a crock.

3. “Credit scores discriminate”

This is a half-truth.

FICO is quick to rattle off several things it doesn’t include in credit scores: race, color, religion, national origin, sex, and marital status. (Because that’s the law.) It also mentions a 2010 Federal Reserve study that concluded credit scores don’t treat people differently based on race, ethnicity, or gender.

The reality: The bigger picture is more muddled, as Lisa Rice and Deidre Swesnik from the anti-discrimination group National Fair Housing Alliance have argued in the Suffolk Law Review.[8] They say that there’s a historical double standard in the market that unfairly affects the credit of minorities even if they’re judged by the same criteria — they get the same treatment but different results.

Why? The scoring model itself might not be discriminatory, but when somebody else discriminates, it can taint the data. The authors cite a 2011 Justice Department settlement with mortgage lender Countrywide, which allegedly charged more than 200,000 black and Hispanic borrowers higher fees and interest rates than it did white people.[9]

“Thousands of families who should have received prime loans were steered to subprime loans,” the authors say. “It is reasonable to assume that their credit scores were negatively impacted by the mere fact that they received a more expensive subprime loan.” (Lest you think that was an isolated incident, check out the many more recent instances of widespread discrimination in this list from the Justice Department.)[10]

Some U.S. senators make a similar argument about using credit reports for hiring. They argue it disproportionately disqualifies women and minorities, and they’re proposing legislation to stop the practice. Dozens of civil rights groups, from the NAACP to the National Organization for Women, back it.

4. “Checking your own credit hurts it”

This is a delusion.

Some people believe checking your report, your score, or both, hurts your creditworthiness. Neither is true.

The reality: A credit check is known in the industry as a credit inquiry, and it comes in two types: soft and hard. Soft inquiries appear on your credit report, but they don’t affect your score because they’re invisible to everyone but you. They include your own requests, checks by companies you already have accounts with, and checks by companies that send you those annoying pre-qualified credit offers. (Yep, that’s how they know you’re pre-qualified.)

Hard inquiries, on the other hand, can and do affect your score. Each time you apply for some kind of credit, you’re giving permission to check your score — which shows up on your report and affects your score, although not as much as you might think.

5. “Asking for credit hurts your credit”

This is a half-truth.

Hard credit inquiries can hurt, but usually not much, and the damage is temporary. While bankruptcies can stay on your report for 10 years and late payments for seven, inquiries affect you for two or less.

The reality: The more credit and credit history you have, the less inquiries matter. If you’re a credit newbie, it’s a bigger deal — but you have less to lose by asking, anyway.

Here’s FICO…

“For many people, one additional credit inquiry may not affect their FICO score at all. For others, one additional inquiry would take less than 5 points off their FICO score. Inquiries can have a greater impact, however, if you have few accounts or a short credit history.” [11]

You just don’t want to get carried away. The more inquiries lenders see, the more scared they are that you’re credit crazy and likely to go bankrupt. In their eyes, every additional inquiry is potential extra debt that hasn’t shown on your report yet.

The exceptions are home and auto loan inquiries. Because you’re expected to comparison shop on big purchases like these, FICO’s formula lumps together all the inquiries from a 30-day period.

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6. “You have to go into debt and stay in debt to get good credit”

This is a lie.

One theory that floats around is that the only way to have a good credit score is to go into debt, stay in debt, and continually pay your accounts perfectly — without adding too much debt or paying too much off. In other words, stay in debt for as long as you can.

The reality: The only inkling of truth in this myth is that you have to play to win. It’s also true if you play without knowing the rules, you’re going to lose. But in general, good credit scores belong to people with less debt.

Take what FICO calls a credit utilization rate. That’s the percentage of available credit you’ve tapped — so if you have a credit card limit of $5,000 on one or across multiple cards, and your statement(s) show a balance of $1,500, your rate is 30 percent. Having a rate below that is good for your credit score, since it shows you are in control of your finances and not a desperate gambling addict.

In the same vein, not paying off your debt, not paying on time, and having too many credit cards can hurt your score.[12]

Sure, you can argue using credit cards at all will mean you’re going into debt even if you pay off the balance in full every month. You could also argue that you’re continually in debt to the phone and utility companies because you pay those bills on a monthly basis. But that’s dumb.

You don’t have to go into debt to get good credit. If you’re responsible, you can build credit and make money doing it.

7. “Closing a credit card hurts your score”

This is a half-truth.

If you get a new card with a higher limit, better terms, or more rewards, you might not use the old card as much — or at all. But closing it won’t help your credit, and it might hurt.

The reality: Remember that thing called credit utilization rate? Closing a card hurts it and could also hurt your score unless you start spending less.

Say you have a card with a credit limit of $3,000, and you get a new one with a limit of $2,000. Now when you use $1,000 of the credit available, your rate is 20 percent. Close that old card, and your rate becomes 50 percent. You suddenly look riskier for spending the same amount of money and taking the seemingly responsible step of dropping a card you don’t need.

On the other hand, it might not hurt your score much if you manage your utilization rate, or if the new card more than makes up for the credit limit of the old one. And it certainly doesn’t make sense to keep a card you don’t plan to use if it has an annual fee.

8. “FICO is a government agency”

This is a delusion.

The acronym FICO sure sounds like it stands for something like Federal Institute of Credit Opportunity, and you can’t be blamed for thinking something as essential as credit would be run by the government. But it’s not.

The reality: FICO was previously known as the Fair Isaac Corporation, after founders Bill Fair and Earl Isaac. TransUnion, Experian, and Equifax are also private companies. The federal Consumer Financial Protection Bureau can regulate the industry, and there are already laws like the Fair Credit Reporting Act that set out rules for credit reports and prevent discrimination. But there’s nothing saying they have to explain exactly how credit scoring works, and they don’t.

9. “Credit scores work the same for everybody”

This is a delusion.

When people explain how credit scores work, they usually give this breakdown from FICO…

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • Types of credit in use: 10 percent
  • New credit: 10 percent

What they tend to leave out is where FICO says this: “These percentages are based on the importance of the five categories for the general population.”[13]

The reality: As FICO tells it, the importance of any particular factor depends on your overall credit profile. People who haven’t been using credit for long don’t have much of a payment history (whether you paid on time) or a credit history (how old your accounts are). All their credit is new credit — so the percentages above are different for them.

“As the information in your credit report changes, so does the importance of any factor in determining your FICO Score,” the company says.

How different? And how much of that is misdirection to keep people from figuring out the exact formula? There’s no telling since FICO doesn’t offer a similar pie chart for any other group of people. They want you to learn the principles of good credit, not how to game their system.

The closest the company gets to revealing how credit mistakes affect people differently is just one chart, which gives a credit background for two people, their initial scores, and what happens to their scores after they max out a credit card, make a late payment, or go bankrupt.[14]


10. “There isn’t just one credit score, there are dozens, so your score doesn’t matter”

This is a half-truth.

John Ulzheimer, a credit expert who used to work for both FICO and Equifax, is known for saying there are tons of different FICO credit scores. Not one, not three, but more like 50 variations.[15] Some people take that to mean credit scores are all in the eye of the beholder, but he doesn’t say that.

The reality: There are indeed tons of credit scores, just like there are multiple versions of Windows and iPhones. The scoring model gets changed over time and can be altered to focus on different things for different kinds of credit, such as auto loans or mortgages. Then the credit bureaus all have their own variations of those different models.

That means the odds are poor the scores you purchase are the exact same scores lenders see. The odds are even worse if you’re not looking at a FICO score, which is the industry standard, but some other kind of free score estimate or alternative model. For instance, the credit bureaus have developed the VantageScore to challenge FICO, which is a totally different model[16]

But all those variations only matter when you’re on the threshold between an OK loan and a good one, and actually, plan to seek that loan in the next few months. The rest of the time, the exact number doesn’t matter — because the ways to boost it are the same. Like losing weight, you don’t want to fret over the number daily. Just keep doing the things you know will move the needle over time.

Kristen Grau contributed to this report.

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About the Author

Brandon Ballenger

Brandon Ballenger

Having more than $10,000 in student loan debt has a way of piquing your interest in personal finance. And because my degree was in English and public communication, I get to share that interest with you. My wide-ranging stories on money and business have run on Business Insider, the Christian Science Monitor, Reader's Digest, the front pages of and Yahoo! Finance, Money Talks News, and the South Florida Business Journal. In my free time, I like to jump off skyscrapers and play video games.

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