Don't let what you don't know hurt you
What Students Need to Know About 6 Credit Score Myths
by Nate Matherson
Video: Credit Score Fact vs. Fiction
How to Close a Credit Card Account
Financial Tips for Recent College Graduates and Their Parents
Institutions of higher learning bombard students with an overwhelming amount of information that includes advice on how to manage credit scores, the litmus test that lenders use to calculate your credit worthiness. You're supposed to be a responsible borrower who pays back student loans and credit cards in a timely manner. However, most students have no clue about the calculation of credit scores. In fact, credit score myths make the Loch Ness monster a viable underwater creature.
The fact is that students who pay off debt in a timely manner can expect credit score rewards as calculated by the three primary credit bureaus: Experian, Equifax, and Trans Union. However, you need to learn more about how the major credit bureaus calculate your credit score and avoid falling victim to one of six credit score myths.
Demographics Do Not Matter
Credit cards do not use the same risk factors that auto insurers use to calculate rates. In fact, demographics such as age, gender, and race have no bearing on your credit score. President Gerald Ford signed amendments to the Equal Credit Opportunity Act in 1976 that forbids creditors from basing lending decisions on the age, gender, race, color, or religion of a borrower. The same statute also applies to credit scores. A 40-year-old white male does not receive a credit score advantage over an 80-year-old Spanish female. Although diversity represents a vital part of a student's education, it has no relevance in credit score calculations.
Does Closing Your Credit Cards Boost Your Credit Score?
No. This myth prompts many students to pull out a pair of scissors and start slicing through their credit cards. One of the five factors involved in determining credit scores calculates your debt utilization ratio. The ratio determines how much debt that you incur compared to how much credit you have at your disposal. Closing credit cards reduce your available credit and thus, increases your debt utilization ratio. A higher debt utilization ratio causes your credit score to drop like a falling rock. If your credit cards singe your hands, find a remote place such as a safety deposit box to eliminate the urge to go on credit fueled shopping sprees.
Closing Does Not Make a Credit Card Disappear
Many students falsely believe that when the close credit cards, they have performed some David Copperfield magic and made the cards disappear from their credit histories. You cannot expect the three major credit bureaus to ignore late payments and overdrafts simply because you shut down one or more of your credit cards. Any negative information that pertains to your credit card history stays on credit bureau records for at least seven years. Even then, you may have to write the bureaus to expunge the bad credit history information from your records.
Check Your Credit Score
The myth that checking your credit score undermines your credit worthiness is patently false. Students fall for this myth because they do not understand the difference between hard and soft credit report inquiries. Hard credit score inquiries involve outside parties, such as potential employers who want to use credit scores as one factor that determines your employment credentials. When you inquire about your credit score, you perform a soft inquiry that does not influence your credit worthiness. You should stay on top of your credit score by regularly checking with the three primary credit bureaus.
Cosigning Does Make a Difference
Your parents may not know this, but cosigning a loan for you can negatively affect their credit score. The loan or credit card that your parents cosigned is as much their responsibility as it is yours to pay off the debt in a timely manner. If you miss a payment or exceed your credit limit, both you and your parents receive credit score penalties. Make sure you understand the terms of a debt obligation clearly, before you involve a cosigner whose strong credit score may suffer due to your financial negligence.
Not All Credit Scores Are Created Equal
Students hear a lot about FICO and the importance of the metric for calculating credit scores. Although FICO represents the most popular way to determine your credit score, it certainly is not the only metric used by credit bureaus to determine whether you qualify for a loan or credit card. In 2006, the three big credit bureaus created a metric that differed slightly from FICO. Some credit scores take factor in non-traditional financial calculations and even avoid financial data supplied by Experian, Equifax, and Trans Union.
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Under law, you are eligible to receive free credit reports from the big three credit bureaus one time per year. However, the credit reports do not include credit scores, which lenders analyze to determine your credit worthiness.
Thinking that credit reports include credit scores may be the biggest credit score myth of all.
Reviewed March 2017
Nate Matherson is a Co-Founder at LendEDU.com! LendEDU is a marketplace for student loans and student loan refinance. LendEDU helps borrowers find the best terms and rates available with one application.
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