Credit truths

Our panel of experts will talk through a few credit myths and share some credit truths.

Chapter 2: Impacts to your credit: Inquiries, cash and income

This chapter is all about getting to the heart of the matter. This video and conversation identifies some credit facts and myths to help you gain understanding and learn how to manage your credit. The Credit myths: Discredited worksheet will help too. Here are a few points from the video.

Credit myths

  • Applying for a credit card can hurt your credit score. Unfortunately, applying for a credit card or loan creates a "hard hit" on your credit report, which can sometimes hurt your score. When you apply for a credit card or a loan it creates a hard credit inquiry, and hard credit inquiries make up 10% of your overall credit score. To avoid this, spacing out credit or loan applications over a period of time will limit the times these hits show up. These inquiries remain on your credit report for two years but only affect your actual credit score for a year.
  • Paying cash for everything improves your credit score. Cash is invisible to lenders. If you pay cash for everything, it doesn't show the credit rating bureaus that you are able to manage credit responsibly.
  • Your income has an impact on your credit score. This is a confusing one but the reality is credit bureaus don't consider income in determining credit scores. Although some lenders look at both income and debt-to-income ratios for decisions on how much to lend you, your actual credit score is not impacted based on your income. Even low wage earners can have a really good credit score. High wage earners can have a very low credit score.

Credit truths recapped

  • Lenders look at your credit score and gauge your ability to manage different types of credit. The major types are:
    • Revolving Credit. These can be credit cards or other forms of credit that do not have an end date or term. You have a credit limit and must make payments toward the balance each month.
    • Installment Credit. These may include student loans, car loans, mortgage loans and other types. Installment credit is a loan that's repaid over a defined period of time.
  • Your credit score is determined by:
    • Payment history (35%)
    • Credit utilization ratio (30%)
    • Length of credit history (15%)
    • Credit inquiries (10%)
    • Credit mix (10%)
  • P aying the full balance immediately will improve your credit score.
  • Paying on time is the most important thing you can do to improve your credit score.

Your chapter 2 checklist:

Next step

Watch the next video in the series, How to rebuild credit.

Video Transcript

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
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