The Top Five Myths You Thought Hurt Your Credit

Most consumers understand that building and maintaining good credit matters. Most also know credit scores play a central role in loan approvals, from mortgages and car loans to credit cards and store credit. Unfortunately, clarify seems to end there. Contrary to popular belief (and even a fair amount of reason), the following pieces of information do NOT factor into your FICO credit score:

1. Your Income

2. Your Bank Account Balances

3. Your Employment Status

4. The Credit Card Interest Rates

5. Child Support You Pay

Why Credit Myths Still Exist

Credit myths pervade our society. Blogs, Facebook posts, Tweets, Pins, and Snaps fill the Internet with misinformation and misguided tips on building or rebuilding your credit rating. While many loan officers provide potential borrowers with good ideas for building their credit, some offer suggestions that turn out to harm the consumer’s rating. Credit repair agencies and even many law firms can give advice that might help temporarily but can cost thousands of dollars.

Most consumers wisely acknowledge that they understand very little of how commonly-used credit scoring models work, including the two most popular credit scores FICO and VantageScore. Where can you turn, then, when you want to learn more about building credit, especially in advance of qualifying for a home loan, applying for a job, or moving to a new apartment?

Reports and Scores

When evaluating whether a statement about credit scores is a myth or not, it will help you to remember this one fact:

If a piece of information is not on your credit report, it will neither help nor hurt your credit score.

As a refresher, your credit report lists all your credit-related activities (loans, payments, collections, etc.) from the past 7 to 10 years. You might also know it as your credit history, your credit file, or your credit record.

Think of your credit score (also known as your credit rating) as a grade on how you are doing with credit. It takes into account all the information on your credit report, runs it through a statistical algorithm, and produces a score that predicts the likelihood that you will miss debt payments in the future. By far, the most common credit scores in use by lenders are produced by FICO (a data analytics company), start at 300 on the low end, and go to 850 at the top. Higher scores indicate a higher likelihood of the borrower paying on time and as agreed.

The following are the most common myths consumers believe affect their credit score but in reality have no impact at all:

Income

Income does not factor into your credit score. Whether or not consumers express this myth openly, most believe the wealthy have better credit scores than the poor, meaning income must be a factor. Leaving aside the difference between wealth and income, income and wealth (net worth) factor into the most common credit-scoring models used in the US. In fact, consumer reporting agencies (CRAs) such as Equifax, Experian, and TransUnion do not even list income on a consumer’s credit report. The results from US laws that prevent discrimination. Outside the US, consumer reporting agencies in some countries do include income on their credit reports. This appears to support the notion that income can play a predictive role in credit scores, just not in the US.

Bank Account Balances

Along similar lines, your bank account balances have no influence on your credit rating. Still, many believe if they have a well-funded savings account, it will help them build their credit rating. In truth, a consumer’s credit rating indicates his or her likelihood of missing debt payments in the future and not how much money he or she has in the bank. In reality, consumers deal with debt payments differently than they do with cash. Consequently, credit scoring models do not use savings account and bank account balances when determining a consumer’s credit rating.

That said, individual lenders typically ask borrowers about income and savings when deciding to approve a loan and how much to loan.

As a related issue, using your debit card will never build your credit rating, even if you choose to process is at the store as credit. Debit card activity has absolutely no effect on your credit score. Using a debit card does not correlate to your ability or tendency to make your debt payments on time or as agreed.

This myth likely stems from the generally held belief that using a debit card is more responsible than using a credit card. In reality, payments made with checks, cash, bitcoin, checking account direct debits, debit cards, and prepaid cards (even those with a Visa or MasterCard logo on them) have no effect whatsoever on your credit rating. In fact, even purchases actually made with a credit card do not affect your credit rating. Rather, credit card balances, payments, and general “account activity” factor into your score.

Employment Status

Your employment status does not factor into your FICO credit score. This myth persists for good reason. Individuals who have been unemployed and who are preparing to look for employment in the coming few months actually have the right to a free credit report. More and more employers include credit checks as part of their new hire background checks. Your credit report may even list your current and/or former employers, so it seems logical to assume there must be a relationship between your credit score and your employment status. While lenders typically request your employment status on loan applications, such information does not factor into consumer credit scores. No information on a credit report having to do with the consumer’s identity (name, address, phone number, employment, social security number, marital status) can factor into the statistical scoring models.

Interest Rates

While high-interest rates typically lead to higher monthly payments and, consequently, more financial difficulties, interest rates on your credit card, car loan, home mortgage, and other loans have no effect on your credit rating. If your credit card company raises your interest rate, it may lead to a higher monthly payment, but it will not hurt or help your credit rating.

Child Support

Child support obligations and payments are not generally reported to the CRAs. However, the Fair Credit Reporting Act allows for the reporting of delinquent child support accounts if reported and/or verified by a local, state, or federal agency involved in the collection or distribution of child support payments. If such is the case, the account typically reports in the public records section, though some jurisdictions may report differently. That said, FICO claims to ignore child support payments altogether in its scoring calculations. In reality, the truth rests somewhere in the middle. Because methods for reporting child support obligations in arrears can vary by state and agency, some child support payments might show as 30 to 180 days late in the credit report payment history section. Other consumers report that after paying off their back child support, the state agency removes the account from the credit report completely.

The Reality

FICO publishes a list of five factors in its credit score model: 1) payment history, 2) usage and balances, 3) age of accounts, 4) new applications, and 5) mix of account types. However, these five factors represent, albeit imperfectly, nearly 40 codes that CRAs report as factors in your credit score.

With so many components in your credit score, it can be tempting to lean on plausible but inaccurate beliefs to make sense of how to build or rebuild your credit. Since your credit score attempts to predict your future credit behavior, keep in mind that it bases such predictions on past credit behavior. Unless it is credit-related and on your credit report, it is not a factor in your standard credit score.

Related Questions

What is the average credit score?

The average US credit score varies over time and depends upon data origin (credit bureaus), credit score version, and even the regions of the country included. Experian reported the average FICO 8 score in 2019 was 703 while WalletHub reported in 2020 the average VantageScore was 680.

What credit score do most lenders use?

The vast majority of lenders (up to 90% according to FICO) in the US use a credit scoring version from FICO, although competitor VantageScore reports making sweeping inroads over the past 10 years, with up to 4 Billion of their scores used by lenders.