Credit Scores: Myths Busted, But the System Still Doesn’t Make Sense

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Lenders use credit scores to instantaneously evaluate what sort of loan, if any, should be approved for an applicant hoping to buy a car or home or simply get a new credit card. There are tons of misunderstandings as to what makes a good or bad credit score.

The WSJ clears up many of these misunderstandings by way of busting myths, such as:

My credit score is a good reflection of my financial smarts and good behavior.
Not really. Your score doesn’t reflect your income, employment history or your assets, which should be a part of your overall financial picture. It also doesn’t show whether you pay your rent or utilities on time. As a result, a credit score is less like a report card and more like an SAT score—your results on a particular date that seek to predict your future credit success or failure.

And this:

I was late on a payment, but the debt is now paid off. So I’m good, right?
Afraid not. The single most important factor in your score, accounting for 35% of the total, is whether you have paid your bills on time. One late payment will ding your score for up to a year, very late payments can hurt you for two or three years, and collections and bankruptcies can sting for up to seven years.

Why is there so much mystery, and why are there so many misunderstandings in the first place? For one thing, the way that scores are tabulated doesn’t seem particularly logical. It doesn’t matter if a person is habitually in debt—so long as he or she has a history of paying off the minimum balance, it’s all good.

No matter how muddled the system is, one thing’s clear: Paying for a credit-score-tracking service is unnecessary. It certainly won’t help you get a loan. Even if you do pay to get your credit score, it probably won’t be the same score that a lender sees—because, as mentioned above, the score only reflects your debt and financial situation for one specific moment in time, not necessarily when you’re applying for a loan.

As money-saving expert Greg Karp stated not long ago, paying for credit-monitoring services is almost always a waste of money. The WSJ story offers basically the same takeaway:

You can … see each of your three credit reports—which include all the activity that is used to determine your score, but not the score itself—for free once a year by going to Because your scores aren’t likely to vary by much, ongoing tracking services are usually unnecessary.