Borrow Carefully

Myth or Truth: What you need to know about your credit score

Read: 3 minutes

Are you plugged into your credit score? On the surface, it's deceptively simple—just an ordinary three-digit number—but it can determine your ability to get a competitive rate on a mortgage, car loan or business loan.

More and more Americans are realizing the importance of their credit. According to a recent Chase survey, 77 percent know their credit score—a 10 percent jump from last year. And 80 percent are working to improve it.

One of the first steps is clearing up the myths surrounding credit. Here are a few of the most common 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 money," says Ethan Dornhelm, senior principal scientist at FICO. “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 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

One myth that Dornhelm often hears is that carrying a balance on your credit card will improve your score. The idea is that a big balance shows that the cardholder can manage their credit effectively.

The truth is, you should pay off your credit card monthly or pay off as much as you can. The lower your credit utilization ratio—which is your total credit card debt divided by your total credit limit—the better your score. In general, it's ideal to keep your credit utilization ratio under 30 percent.

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. The length of your credit history accounts for 15 percent of your credit score, and the longer it is, the higher your score. So, while your old credit card may be just a memory, it can still pay off.

Myth #4: Employers can check my credit score

The media gets this one wrong from time to time, causing confusion. Employers cannot check your credit score. However, with your permission, an employer can pull a credit report, which could tell them about your current debts and credit lines, debts that have gone to collections, and other information about how you handle money.

It's also worth remembering that a credit report review is a “soft" inquiry, so it should not affect your credit score.

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?

The reason is that there are multiple versions of your FICO Score, tailored to different kinds of loans. “Generally speaking, they tend to be relatively consistent and similar but you may notice subtle differences," says Dornhelm.

As you get a better handle on your FICO Score, you can begin to take actions to improve it. Lowering your credit utilization ratio, wiping out balances, and keeping old accounts open could all help bring your score up—and put you in a better financial position.


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