7 Common Credit Score Myths
Did you know that you have more than one credit score? Did you know that your income doesn’t affect your credit score at all? If this is news to you, read on as we expose seven common myths about credit scores.
Myth No 1. - Each person has only one credit score
In Canada there are two credit reporting agencies, Equifax and TransUnion. These agencies create credit reports and credit scores for Canadian consumers based on the information that creditors supply to them. Unfortunately, not every creditor reports their information to each of these agencies. A creditor may report to one agency and not the other. Creditors may also only update the credit agencies with your current information once a month—or longer in some cases. Consequently, Equifax and TransUnion may not have exactly the same credit information about you. This will mean that each of these agencies will generate a different credit score for you based on the information that they have on record.
Myth No 2. - You can get your credit score for free once each year
You can get a free credit report each year from both Equifax and TransUnion, but you have to pay to find out your credit score. If you don’t want to pay, but you would like a rough idea of what your credit score is, you can get a general idea with this credit score estimator tool.
Whenever you apply for credit or open a new chequing account at a bank or credit union, they will check your credit. At this time you can ask your banker what your credit score is and also ask them to show you your credit report (most banks either use Equifax or TransUnion. So they will probably only be able to show you the one credit score that is important to them). You can also ask them to show you the strengths and weaknesses in your credit report if you want to improve your credit score. If you want to get your free credit report right now, click here to find out how.
Myth No 3. - Having a good job or earning good money will strengthen your credit score
Your occupation and your income are not part of the credit scoring formula. Even if you are rich and famous, 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—there isn’t even a place to put it on your credit report. 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. Your credit report only shows your payment history not your payment potential.
Myth No 4. - Spouses have the same credit score
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 a policeman pulls you over for speeding, you can’t get the policeman to put the ticket on your spouse’s driving record. It goes on yours if you are at fault. The same is true with your credit report. If you are late with your payments, the record goes on your credit report and not your spouses if the debt is only in your name. However, if a debt is joint, then the late payment record would likely go on both credit reports. If you and your spouse are joint on all of your debts, then it is possible that you will have similar credit scores, but it is still unlikely that your scores will be the same for a number of reasons: the length of time each of you has had credit is probably different, you may have had a debt in only your name within the last 7 years, and not all joint debts always report on each person’s credit report (yes, this is weird. It’s one shortcoming of the system).
Myth No 5. - Your credit score is not affected by your ex-spouse when you get divorced
When a lender grants you and your spouse credit or a loan based on a joint application, they are approving the application based on the fact that two people have promised to repay the debt. Just because you no longer live with your spouse or are divorced from your spouse does not change anything from a lender’s point of view. If you want to change who is responsible for a debt, you or your ex-spouse must either pay out the debt with a new loan or re-qualify for it in one person’s name only. If you don’t do this and leave the debt as it was, you remain fully liable for the repayment of that debt. If you thought that your ex-spouse was making payments on that debt, but the creditor informs you that they have stopped making payments, then it is your responsibility to continue those payments. If it took the creditor a while to track you down, your credit could be damaged by the missed payments that you didn’t know about. So your credit score can be impacted by your ex-spouse if you still have any joint debts with them.
Myth No 6. - Bankruptcy permanently ruins your credit
If you go bankrupt, a record of the bankruptcy will remain on your credit report for 6 to 7 years depending on which province you resides. During that time, the bankruptcy notation will negatively impact your credit score and make it difficult to obtain credit. However, after the 6 or 7 years, 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, there are many good bankruptcy alternatives that can work out much better for many people. Contact us to find out your options.
Myth No 7. - Becoming debt free will give you a perfect credit score
While becoming debt free and staying debt free is a fantastic way to live, it’s not a silver bullet for your credit score. Your credit score is based on your credit payment history and not just the amount of debt that you have. Not having any debt will help your credit score as long as you maintain at least on active credit account—like a credit card or a line of credit. If you don’t have any active credit, the credit scoring system doesn’t know how you are currently handling your credit. If you use one credit card occasionally and pay it off completely every month, then the credit scoring system can see that you are using credit responsibly.
For more information on how your credit score is calculated, click here.
Below are some more credit myths and credit score topics we have recently addressed on this blog:
How do parking tickets affect your credit?
Does your credit score fall every time someone checks it?
How to get a super credit score.
3 Common ways people wreck their credit.
You don’t have to be in debt to build credit.
Myth: "I've got excellent credit because I pay all my debts on time."