SACRAMENTO, Calif. -- Credit scores inspire anxiety in many consumers. We can't easily see them, and we don't always know what's lurking behind them. Perhaps that's why there seem to be so many myths and misperceptions about exactly what's in a credit score.
In a recent national survey by Visa Inc. that asked U.S. consumers what factors negatively affect a credit score, plenty of answers were flat-out wrong.
About 25 percent mistakenly thought that where you live can ding your credit score. Others said -- erroneously -- that your job, your ethnicity or even your age could affect a credit score.
The findings are "dismaying," said Jason Alderman, Visa's global financial education director. But, he added, they aren't altogether surprising.
"People are uncomfortable talking about money, so they perpetuate misinformation by not discussing it with friends, family or at work," said Mr. Alderman. "These [erroneous] ideas pop up ... but people don't talk about them, so the myths become solidified."
A credit score determines so much of your financial life, from what you'll pay on a car loan or mortgage to, in some cases, whether you'll get hired. Ranging from a low 300 to a perfect 850, the higher your score the better terms you'll get from lenders and creditors.
Gerri Detweiler, a personal finance expert for Credit.com in San Francisco, says one of the common myths is that getting credit counseling or taking a debt management class is as bad as filing for bankruptcy.
"Credit counseling used to be reported in a way that had a negative impact, but it's not true anymore," Ms. Detweiler said. And taking a debt management class has never affected your credit, she added.
But even the negative factors on a credit score eventually get dropped from your credit history. Things like Chapter 11 bankruptcies, foreclosures, late payments and other hits generally fall off after seven years. And the older a negative citation is, the less impact it'll have on your credit score. As credit score site MyFico.com notes, a 5-year-old debt collection will hurt far less than one that's 5 months old.
Credit scores are based on credit reports, the financial history on you as compiled by the nation's three credit reporting bureaus: Equifax, Experian and Trans Union.
By law, every consumer is entitled to a free, annual credit report from each of the three bureaus. To request your copies, call toll-free 877-322-8228 or go to AnnualCreditReport.com.
It's a good way to spot any errors that need correcting and to get a snapshot of how you look to lenders.
According to Visa's survey, 42 percent of Americans don't regularly take a look at their credit score. "If you don't know where you are on the map, you can't get to where you need to be," said Mr. Alderman.
And why does a credit score matter so much? Money.
On a loan, a higher score can save you thousands of dollars. For instance, on a 30-year, fixed-rate mortgage for a $250,000 house, a buyer with a credit score below 640 will pay about $258,700 in interest, according to MyFico.com. The buyer with a credit score of 760 or higher will pay only $170,800 in interest over the life of the loan. That's a difference of almost $250 a month.
• Pay your bills on time. It's the quickest, easiest fix. If you're 90 days late on a phone bill, it'll get reported on your credit report.
• Pay down debt. That's not always easy, although recent studies show that more consumers are whittling down their debt-to-income ratios. Wherever possible, pay down the credit card with the highest interest rate first.
• Keep low balances. "If you have $50,000 available credit on all your credit cards and you're carrying a $45,000 balance, you're close to maxing out. That makes credit bureaus nervous," said Mr. Alderman. It's best to keep your debt-to-available-credit ratio at below 35 percent.