Kimberly Palmer

Credit scores can affect your credit card interest rates, how much you pay on a car loan or mortgage, and even whether you get a job. But despite the importance, 4 in 10 Americans never bother to check their credit scores. What's more, many people incorrectly believe that age and income influence the number, when only credit history matters.

People can improve their scores, which for the most part range from 300 to 850, by making their payments on time, paying off debt, avoiding using more than half of their credit lines, and keeping cards in good standing for long periods. Consumers are entitled to a free credit report every year through www.AnnualCreditReport.com, so they can check for any mistakes or problems.

Ready to find out just how well you understand this all-powerful number? Here are 9 myths -- and truths -- about credit scores:

Credit Score Myth 1: Each person has one credit score

Truth: Each credit reporting agency calculates a credit score for you, and they aren't always the same. Ken Lin, chief executive of the Web site CreditKarma.com, explains that while all of the credit bureaus (the main ones are Equifax) use the same criteria to judge your "credit worthiness" and often come up with similar scores, they can vary because they have different information and may analyze it slightly differently.

Credit Score Myth 2: You can get your score for free once a year

Truth: While you can get your credit report once a year at no charge through www.AnnualCreditReport.com, you almost always have to pay for your actual score (usually around $15) or sign up for an ongoing service. The good news is that you don't really need your score as long as you regularly review your report and make sure there are no errors or problems.

Credit Score Myth 3: You share a credit score with your spouse

Truth: "Each person has their own credit score, 'til death do you part,'" says Lin. But if you open joint accounts (including credit cards, auto loans, or mortgages) with your spouse, you will share information on your reports and late payments by one person can affect the other person's score.

Credit Score Myth 4: When you get divorced, your credit score is no longer affected by your ex-spouse

Truth: Unfortunately, credit scores can stay intertwined long after a marriage ends. If you are still registered as a co-owner of a credit card that is also used by your ex-spouse, you are considered responsible for that debt, regardless of the state of your marriage. (In some states, all accounts opened during marriage are considered joint, regardless of whose name is on them.) Post-divorce credit problems, which are common, usually can be avoided by closing joint accounts.

Credit Score Myth 5: If you file for bankruptcy, your score is permanently ruined

Truth: Not only will your credit score begin to improve after only one year of making on-time, regular payments, but after seven to 10 years, it can fully recover and lenders will be willing to loan to you at reasonable interest rates.

Credit Score Myth 6: Having a good job improves your credit score

Truth: It's a common misconception, but your income actually has no effect on your credit score, explains Lin. Not even winning the lottery or inheriting a lot of money will have an impact. Again, the only thing that matters is your credit history -- whether you pay your bills on time.

Credit Score Myth 7: Paying off a big chunk of debt will significantly improve your credit score

Truth: If you have a lot of debt, especially if it's approaching your credit limits, then paying it off can improve your score, says Lin. But many people don't realize that you shouldn't cut up your plastic and stop using it altogether. People with the highest credit scores tend to be using about 10 percent of their total credit limits each month, Lin explains.

Credit Score Myth 8: Staying debt-free will give you a perfect credit score

Truth: You actually need to pay off debt in order to prove that you can manage loans responsibly. If you've never taken out any sort of loan, it can be difficult to persuade a credit card issuer to give you a credit card. (That's why college students often need their parents to co-sign their credit cards.) If you start slowly by using credit cards responsibly and paying all of your other bills on time, you can build towards a strong credit score.

Credit Score Myth 9: It's easy to fix errors on your credit report

Truth: If only this were so. It can actually be quite difficult to correct mistakes, and most credit reports contain them. While credit bureaus are required by law to correct errors, the process can be tedious. The Federal Trade Commission recommends including copies of any documents that support your position as well as the copy of the report itself, with the errors circled. The FTC offers a sample dispute letter on its Web site. While it's tempting, avoid paying for a credit-improvement scam: Dozens of companies offer to help improve scores for a fee, but many involve questionable tactics. Instead, just stick with the basics of paying all your bills on time, staying well under your credit limit, and keeping accounts in good standing over many years.

 

Personal Finance - 9 FICO Credit Score Myths Debunked