5 Myths About Credit Scores: How Well Do You Understand Yours?

Learn more about how your credit health is measured

By Farnoosh Torabi | Posted: 9/20/2017

Ever wonder what your credit score really means or what factors truly weigh on that three-digit number?

If you're nodding yes, you're not alone.

There are several misconceptions and myths leading to widespread confusion. To get some facts straight, I spoke with Ethan Dornhelm, senior principal scientist at FICO, the company behind the FICO^® Credit Score, which is used in over 90% of lending decisions.

Here are five of the most pervasive myths, debunked.

Myth #1: The Higher Your income the Better Your Score
"We get a lot of people asking, 'Why is my FICO^® Score low? I make great income," says Dornhelm. "There's this impression that somehow anything that makes you seem 'credit worthy' would factor well into your FICO^® Score, but income is not included in credit reports, so it has no impact on your score."

While it's true that lenders will sometimes ask your income when reviewing your loan application – and a higher income may work in your favor – your credit score doesn't factor in your salary. FICO^® Scores are based solely on information listed on your credit report such as your credit history and new accounts.

Myth #2: Carrying a Balance Will Improve Your Score
A recent guest on my daily podcast opens overlaySo Money proudly shared that the best advice he ever received was to carry a monthly balance on his credit card in order to achieve a high credit rating.

This is a falsehood that seems to pop up often. Dornhelm says he has heard this myth time and time again. Some people say they carry a bigger balance than necessary in hopes of showing they're able to "manage" and "use" credit.

Ideally, you should pay off your credit card monthly or pay off as much as you can. Measures of your debt burden, such as the share of your available credit that you're using – make up roughly 30% of your FICO^® Score. The lower your debt-to-credit ratio – which is your total credit-card debt divided by the total of your credit limits -- the better it can be for your score. In fact, FICO says the average debt-to-credit ratio for "FICO High Achievers" is roughly 7%.

Myth #3: Closing My Card Account Will Erase Its History
When you close an account, it doesn't fall off your credit report. "Plenty of your closed accounts show up and tend to show up for many years to come," Dornhelm says.

That's actually good news in a way. While closing an account diminishes your available credit (which could increase that debt-to-credit ratio discussed above), it doesn't erase the fact that you've had that card since, say, 2005 or the first day of college. The length of your credit history remains on your report for several years even after the account is closed. And that's good, since credit history length comprises about 10% of your score. The longer your history, the better for your score.

Myth #4: Employers Can Check My Credit Score
The media gets this one wrong from time to time, causing confusion. But, the truth is that, with your permission, an employer can pull a credit report but not a credit score. And that credit report review is considered a "soft" inquiry, vs. a "hard" one from a potential lender. Those hard inquiries can affect your credit score if they signal that you're looking in many places for new loans.

Myth #5: All FICO^® Scores Are Created Equal
Why is it that you might receive a credit score of, say, 754 directly from FICO while a lender says your score is 748?

Not all FICO^® Scores are the same, because there are multiple versions of it for different kinds of loans. "Generally speaking, they tend to be relatively consistent and similar but you may notice subtle differences," says Dornhelm. For example, explains Dornhelm, "the FICO Auto Score may look more closely at your auto loan repayment history. There are some slight nuances [in the calculation.]"

In addition, FICO^® Scores are based on the records of a credit bureau, and different bureaus may have slightly different information about you, depending on what was reported to them by creditors and any changes or corrections you have requested.

And not all credit scores are FICO^® Scores. Many "educational" credit scores available for free online are not the same as those used in lending decisions, according to FICO.

So it's important to keep an eye on your credit-bureau records – you can get a credit report free from each of the three major credit bureaus every year through the opens overlayAnnualCreditReport.com site – and consider the effect on your credit health when you open and close accounts and decide how to handle payments and balances.

See your FICO^® Score for free and the reasons behind your score on the opens in a new windowChase Slate Credit Dashboard.

The opinions stated are those of the author and are not necessarily the opinions of Chase.

FICO^® is a registered trademark of the Fair Isaac Corporation in the United States and other countries.

Farnoosh Torabi is an award-winning journalist, author, television personality and personal finance expert who provides financial education for Chase Slate.