Common Credit Score Myths

Friday, February 3, 2017 - 01:26

Bankruptcy, Rebuilding Credit


Credit scores are an area of personal finance that seem a lot more mysterious than they actually are. Many people believe that improving them is a matter of trial and error, and as a result there's a lot of "credit score advice" floating around that can end up doing more harm than good. Here are some common credit score myths that might surprise you to hear:

1. Rich people have good credit scores.
Your occupation and your income are not part of the credit scoring formula. Even if you are rich, it doesn’t matter. Your occupation may or may not be reported to the credit reporting agencies when a creditor or lender requests a copy of your credit report, and your income is never reported. Having a stable job and a good income is very important to lenders, but it has nothing to do with your credit report or your credit score.

2. Spouses share credit scores
The credit reporting system is similar to the driver’s licensing system in that everyone has their own record. No one shares a record. If the debt is only in your name and you are late with your payments, the late payments are only reflected on your credit report. However, if a debt is joint, then the late payment notation goes onto both credit reports.

3. Checking your credit report negatively affects your score
This myth comes from confusing two different types of credit score inquiries: hard inquiries and soft inquiries. Hard inquiries are made by lenders or credit card companies when you apply for a new line of credit. Soft inquiries are made by you or by others for background check purposes. Because hard inquiries suggest you might be taking on more credit soon, they usually lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score in any way. This means you have nothing to lose by accessing your own score—in fact, doing so will help you understand what your current credit activity looks like and how you can improve it. 

4. Opening a bunch of credit cards will improve your score
Opening new credit cards gives you more available credit, which in turn lowers your credit utilization ratio. Lowering your credit utilization ratio is a good thing, so opening new credit cards to boost your score might seem like a solid strategy. But remember those pesky hard inquiries? Opening a bunch of new credit cards means a sudden increase in the number of hard inquiries. Each hard inquiry docks a few points from your score, and if many are made within a short amount of time, it makes you look risky, which can further influence your credit score in a negative way.

5. Bankruptcy permanently ruins your credit
If you go bankrupt in Ontario, a record of the bankruptcy will remain on your credit report for 6 to 7 years. During that time, the bankruptcy notation will negatively impact your credit score and make it difficult to obtain credit. However, after that time the bankruptcy record and all records of bad debts (that are the same age) will usually be removed from your credit report, and this will allow you to get a fresh start. If you are struggling with your debts and are considering filing for bankruptcy, contact us today for a free consultation.