Debunking 4 Credit Myths that can hold you back

Highlights:

• Checking your own credit report or score won’t impact your credit scores.
• Multiple credit scores are common, and different numbers with various credit score versions are expected.
• Applying for new credit may or may not lower scores, and the impact varies based on the other information on your credit report when the score is calculated.

Equifax Canada's Senior Compliance Officer and Consumer Advocate, Julie Kuzmic, is a credit literacy expert. Time after time, she hears the same misconceptions about credit scores and reports. 

In this article she debunks four of the most common credit myths.

Myth 1: Checking my own credit report or scores will affect my credit scores 

Julie: When you check your own credit report or scores, this is a “soft” inquiry on your credit report and there is no impact on credit score calculations. Where the misconception comes from is that, when a lender or company makes a request to review your credit reports as part of the account application process, that request is typically recorded on your credit reports as a hard inquiry. This will usually be taken into account when calculating your credit scores. As a reminder, lenders must have your consent before accessing your credit reports and/or scores for this purpose.

The takeaway? Checking your own credit scores and reports won’t affect them. In fact, it can help you better understand the impact of your credit decisions. 

Myth 2: Everyone only has one credit score

Julie: We all have multiple credit scores. Both major credit reporting bureaus in Canada provide multiple score versions. You might wonder how you could have different credit scores when they’re all generally based on the same input data, which is the information on your credit report at the time the score is calculated.

Anyone who’s ever stared down the tomato sauce aisle in a grocery store has probably wondered “what’s the difference?” while scanning all the options. Much like those tomato sauce options, one credit score may have a little more of one ingredient and a little less of another. One version might omit an ingredient altogether while another features it prominently. 

As consumer credit behaviour changes, scoring algorithms may be tweaked to reflect the changes. These adjustments can cause a new credit score version to become available for lenders to use. 

In the same way that tomato sauce variations might have different amounts of salt and garlic relative to each other, the credit score equivalent is that one version might put more emphasis on “total balances of all open accounts”, relative to “total balances of all active credit cards” while another version does the opposite. 

It has always been the case that various banks and lenders don’t all use the same score version. The purpose of a credit score is to predict the likelihood that someone will pay their bills on time. One score version may be a little more effective at this prediction for mobile phone bills while another could perform better when it comes to credit cards.

The takeaway? The fact of multiple credit scores is not new. The two most important aspects of your credit scores that are under your control are:

• Paying your bills on time
• Confirming the information on your credit reports is accurate

Myth 3: All of my credit scores should be within a few points of each other

Julie: It’s very common for people to have different credit score results with different scoring algorithms. In fact, it’s normal to see differences of 100 points or more. One bank might interpret a score of 620 (on the version they use) the way another bank interprets a score of 670 (on their specific score version).

It is a little bit like weighing yourself on one scale and then stepping off and doing the same thing with another scale immediately. You might see different numbers on the scale because they’re calibrated differently, but that doesn’t mean your weight has changed.

As with scales, what matters with credit scores is consistency. Generally a particular lender keeps using the same credit score version every time, which may not be the same one that you as an individual consumer are looking at.

The takeaway? Tracking the fluctuations of one or two credit score versions may not be the best use of your energy since the next lender you approach might not use either of them. It can be helpful to keep an eye on credit scores for an idea of where you stand, but the critical step is verifying the accuracy of information on your credit reports, since all score versions are based on that data.

Myth 4: Applying for new credit lowers my credit scores 

Julie: Applying for new credit is not guaranteed to lower your scores. It depends on the other information in your credit report at the time the scores are calculated. There is no rule in scoring algorithms dictating a certain number of points lost with each new hard inquiry. 

Generally, credit scoring algorithms divide people into risk categories based on statistical analysis. The category dictates how much impact the number, type, and timing of hard inquiries may have on the final scores. 

For example, statistical analysis has shown that people with longer, solid credit histories don’t tend to start missing payments when they take on new credit accounts. So, people in that category may be able to apply for a new credit account or two and not see any change in their scores. 

The same analysis has shown, however, that people with shorter or less solid credit histories may be more likely to start missing payments after they open additional credit accounts. So, people in this category may see a drop in their credit scores after applying for new credit accounts.

It’s also important to note that hard inquiries on credit reports indicate that someone has applied for new credit accounts. They do not include information on whether a particular application was approved or denied. Hard inquiries remain on Equifax credit reports for a period of three years from the date they occurred. They are automatically removed after that time.

The takeaway? It’s generally a good approach to only apply for the credit accounts you need and can financially manage.