Credit Score Facts & Myths

There are many misunderstandings surrounding credit scores and credit in general.  This article attempts to set the myths of credit scores straight by providing you with the facts associated with each myth listed.

Myth:  A Bad Credit Score Will Hurt Me Forever

Fact: A bad credit score is a portrayal of your risk at the moment it was calculated.  When you improve your payments and new information is reported to the credit reporting agencies, your scores wil gradually improve as you improve your financial situation.  Previous credit problems will impact your current credit score less as more time passes.

Myth: A Credit Score Will Determine Whether you Get Credit

Fact:  Your credit score is a huge part of how a lender decides whether or not to lend you money.  Other factors are considered, however, including your debt to income ratio- how likely you are to be able to afford your payments based on the amount of income you currently make.  Lenders consider how long you've been employed, and your complete credit history in addition to the numerical score.  Some lenders will extend credit at a higher interest rate even if you have a lower credit score.

Myth: The use of Credit Scores is an Invasion on my Privacy

Fact: Not really.  Lenders look at the information that is in your credit report in order to determine whether or not to extend credit to you.  Having a credit score just makes their job a little easier- but does not invade your privacy any more than requesting a lender extend you credit would without the use of credit scores.  In fact, when a lender has a credit score to refer to, they actually have less of a need to ask you personal and financial questons.

Myth: Minorities get Unfair Credit Scores

Fact: Credit scores are determine only with credit related data.  Any other factors, including a person's race, gender, nationality or marital status can not be included or used in determining a credit score.  The Equal Credit Opportunity Act makes it illegal for any lender to use that information when determining whether or not to extend credit.  Credit scores are accurate measures of determining whether or not an individual will be able to make their payments and it has nothing to do with minority or non-minority applicants.

Myth: Applying for Credit will Hurt My Credit Score

Fact: If your credit score decreases when you apply for a credit card or loan, it will be by a very minimal amount.  However, if you are applying for several credit cards, or a variety of loans all within a short period of time, it is seen by lenders as a "desperation measure", and is a sign of financial difficulty.  This sends up a red flag and your credit score will decrease from multiple credit requests in a short period of time.  The only exception to the multiple request rule is when you are applying for a mortgage or automobile loan- these are instances that you have to make several inquiries in order to find the best rate, and your credit score is not affected any more by multiple requests performed in a short period of time than it is by a single mortgage or automobile loan request.