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Related topics: credit score, debt, banks, bad credit, Liz Weston

The world of credit can be confusing, counterintuitive and strange. Trying to get a handle on how it all works isn't easy -- which may be why so many myths and misstatements about credit get passed along as fact.

The good news is that people who want to educate themselves about credit can do so by visiting sites like this one and many others, including Creditbloggers, myFICO and the Federal Trade Commission's site.

In the meantime, if you want to sound smart about credit, here are things you don't want to say.

Misstatement No. 1: "My credit score is 740."

You don't have one credit score -- you have many, and they change all the time based on the constantly shifting information in your credit reports.

Image: Liz Weston

Liz Weston

The credit scores most lenders use are called FICO scores, which range from a low of 300 to a high of 850, and you have three of them at any given time -- one from each of the three major credit bureaus. Credit bureaus use the same basic FICO formulas to generate the scores they sell to lenders, although the FICO scores themselves can go by different names:

  • At Equifax, they're called Beacon Scores.
  • At Experian, they're known as the Experian/Fair Isaac Risk Model.
  • At TransUnion, they're called Empirica.

If the credit score you get isn't called a FICO or one of the above names, it's not a FICO. You may be looking at a VantageScore, a competitor to the FICO, or at one of a credit bureau's in-house "consumer education scores" that aren't widely used by lenders and that may not be in the same ballpark as your FICOs.

You can buy two of your three FICOs from myFICO for $19.95. Experian, however, no longer sells FICO scores to consumers, although it still sells them to lenders. So the most accurate thing you can say is something like: "Last time I checked, my Equifax FICO was 740, and my TransUnion FICO was 735. And it's about time Experian started selling FICOs to consumers again!"

Misstatement No. 2: "Credit scores are debt lovers' scores."

If you don't understand much about how credit scores work, it may seem logical that they would reward people who pile on debt. But that's not necessarily the case.

You can get and keep good credit scores without ever paying a dime in interest or carrying debt. You simply need to have, and lightly use, two or three credit cards, paying the balances in full every month.

It's true that it's easier to achieve good scores if you have a mix of credit: revolving accounts (credit cards) and installment loans (a mortgage, auto loan or student loans, for example). But people who use credit accounts to dig themselves deeply into debt are unlikely to have good credit scores for long.

That's because credit-scoring formulas are extremely sensitive to how much of your available credit you're using at any time, particularly on revolving accounts. So if you max out your credit cards or even come close, you're likely to hurt your scores. (This is true, by the way, whether or not you pay your balance in full. The balance reported to the credit bureaus, and used in credit score calculations, is typically the balance from your most-recent statement, before you sent in your payment.)