7 common credit score myths you should never believe

1. Checking your score hurts it

Keeping an eye on changes in your score or report can help you detect errors, keep track of your spending habits and figure out how to improve your credit — but few Canadians are taking advantage of this.

In fact, 57% of Canadians have never checked their credit score and 40% say they don’t want or need to know what it is, according to a 2016 Ipsos survey for Capital One.

The fact of the matter

Checking your credit score or report counts as a “soft inquiry” — which means that it won’t affect your score.

You can check it for free. It is a good idea to monitor your credit score and track your bills regularly to avoid missing any upcoming payments which could mean paying late fees and more interest.

However, when you apply for a loan or a new credit card, a lender will want to check out your credit score to determine whether you’re a reliable borrower. This particular check counts as a “hard inquiry” and will dent your score by a few points, temporarily.

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2. You only have one score

Contrary to popular belief, you have more than one score and it could waver slightly depending on which credit bureau is providing the information.

When you apply for a credit card or a loan and lenders check your credit score, they could be pulling up any one of your scores. You have no way of knowing which, but checking more than one can give you a better picture of your creditworthiness.

The fact of the matter

The two national credit reporting agencies are Equifax and TransUnion. Typical credit scores range from 300 to 900 and credit bureaus generally consider the same factors — like payment history, utilization rate and how long you’ve had credit for — to determine your score.

However, agencies may use different scoring models and could receive different information when they evaluate your credit.

Your credit card issuer, for example, might use a different model from a free online service.

3. The higher your pay, the higher your score

Some people believe a wage increase can directly affect their credit scores — after all, a higher income makes you more attractive as a borrower and you’ll have more funds to pay off your debts.

But, is your income actually included in your credit report, and does it impact your score?

The fact of the matter

The answer is no, your income isn’t included on your credit report, nor is it factored into your credit score. And even if the money’s rolling in, you still want to avoid accruing more credit card debt than you need to — that will affect your score, and not in a good way.

That said, if you’re more financially stable and have been able to pay your bills on time in full without adding up on interest and debt, then yes, you’re more likely to have a better credit score.

And lenders will assess your credit score and your income and employment status when you apply for credit products. A good credit score and a steady income are both key to obtaining lower rates on cards and loans.

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4. Carrying a balance on your credit card improves your score

The average credit card balance for Canadians was $3,661 in the fourth quarter of 2020, according to TransUnion. The Bank of Canada also says 30% of consumers don’t pay their cards in full each month.

Carrying a balance on your credit card ensures that you rack up on interest and owe more money than if you made your payments in full — does that impact your score?

The fact of the matter

With typical credit card interest rates around 20%, paying your monthly bills in full and on time is the best way to maintain a good credit score and potentially save thousands. The general rule of thumb is to keep your credit utilization rate below 30% across all your accounts if you can.

When you make the minimum payments instead of paying off your balance in full each month, you’ll accrue interest and increase your debt. If you also keep making purchases, your credit utilization rate — which divides your total credit card balance by your total credit card limit — increases as a result, and that hurts your credit score.

A 0% utilization rate won’t help you either — lenders want to see that you’re using your credit responsibly.

If you find yourself bogged down by interest and credit card debt, consider a debt consolidation loan to fold all of your debts into one loan with a lower interest rate or refinancing your current loan.

5. Closing a credit card helps your score

You might be thinking about cancelling one of your credit cards — maybe you never really use it or you think it’ll make your debts more manageable and boost your credit score.

There are plenty of reasons for and against closing a credit card.

The fact of the matter

Here’s the thing. Your credit score improves when you have more available credit, a long credit history and a lower credit utilization rate.

So, when you close a credit card, particularly a high-limit one, or one you’ve had for a long time, you’re more likely to harm your credit score than help it.

This doesn’t mean you should never close a credit card, however. If you haven’t been using it very often and you’re paying high annual fees, there’s little point in keeping it alive. Switching to a card with lower or no fees instead could be beneficial.

6. Employers don’t check your score

81% of Canadians don’t know that employers can check your credit score when you apply for a job, according to a 2016 survey commissioned by Mogo.

A bad credit score can affect more than just your loan or credit approval chances — it could prevent you from landing the perfect job, renting a home or even getting a new cellphone with a good plan.

The fact of the matter

A future employer may want to check whether you’re managing your money responsibly, especially if your job involves handling large sums of money or making major business decisions. This check counts as a “soft inquiry” so it won’t damage your score.

The credit report they pull up will show your name, address, SIN number, date of birth, previous employers and information about your debt, like mortgages, credit accounts and student loans — so it is important that prepare and get your finances in order, however.

But, they can’t go about this without your consent, so don’t worry about them sneaking around behind your back.

7. You and your spouse share the same score

When you get married, there are several things you might need to jointly do with your spouse, like applying for a mortgage loan or splitting household bills like groceries and utilities.

You might believe your credit scores get merged into one as well.

The fact of the matter

You and your spouse will still receive separate credit reports and credit scores, even when you combine incomes or bank accounts. Don’t concern yourself with a partner’s past bankruptcy ruining your credit as soon as you get hitched.

However, if your partner has poor credit and you apply jointly for a loan or open an account together, that information will affect both your credit reports and you could end up with less-favourable rates costing you more money.

For example, you might be denied a good mortgage rate from a mainstream mortgage provider, and pay higher rates with another lender to account for the higher risk you present as borrowers together.

So, it’s still important to be aware of each other’s credit history and spending habits before you tie the knot or buy a home together.