What you don't know about credit scores can cost you — big time.
Poor financial literacy can hurt you for years, especially if you don't understand what helps and hurts your creditworthiness, said Heather Battison, vice president, global marketing at TransUnion. But many consumers still believe prevalent myths, according to TransUnion's annual credit literacy survey. The credit reporting company polled 1,000 U.S. adults in June.
Being better informed could make it easier to improve your score. (See infographic below for tips.)
And many consumers could stand to improve. TransUnion estimates the average VantageScore (one of several credit scoring brands) is 645, while another brand, FICO, puts the average at 700. Both scores use a scale of 300 to 850; the higher the number, the better.
Are you falling for any of these credit myths?
Half of respondents (51 percent) told TransUnion they believe that utility payments are always reflected in their score.
The truth is, not all payments are reported to credit-scoring firms. Some utility companies only report late payments or those that have gone into collection, while others report both late and on-time payments.
Play it safe and try to pay outstanding bills as soon as possible, the TransUnion report said, because once an unpaid bill goes into collection, which means the creditor sent your balance to a collections agency to obtain payment, it can have lasting, damaging effects on your score. Even small bills, such as a monthly water bill, can impact your score if left unpaid.
Marital status is not included on credit reports, yet 44 percent of consumers were not aware of this.
Keep in mind, though, that the scores of each individual matter when making a joint purchase or applying for a loan with your spouse. You can't just choose the higher score; you will have to provide both.
When you check your own score, there is no impact. However, when a lender checks your score if you are applying for a loan, it generally has some effect. One inquiry generally reduces a score by five points or less, according to myfico.com.
Regularly checking your score is a good idea, because if you see a big drop and you didn't apply for credit recently, that may be a red flag that somebody else did in your name.
Bottom line: There is a difference between so-called soft inquiries, such as checking your own score, and hard inquiries where a lender is weighing whether to offer you credit.
The impact on your score from closing a card varies, depending on your available credit and account history. Yet more than one-third (35 percent) of consumers believe closing a card decreases a credit score, with another 20 percent saying they have no idea what effect it would have.
If the card has a small amount of credit and a short history, closing it will have minimal to no impact on your score, the report said. On the other hand, if the card has a large amount of available credit and a long history, closing it could have a negative impact on your score.
A third of consumers (31 percent) think a high credit score is required to travel to a foreign country. That is false.
Your credit score doesn't affect your ability to travel out of the country. However, having a good score can help you finance that expensive trip, according to the report. And as always, it's important to pay off any debts that accumulated during your travels on time to avoid affecting your score.