Your credit score is important for your financial life. It affects loan interest rates, credit card approvals, rental applications, insurance rates and even your employment.. But there are many myths and common credit score misconceptions. Knowing the facts can help you manage your credit better. This article debunks 7 common credit score misconceptions and myths that could trip you up.
Myth 1: Checking your credit score can negatively impact it.
There is a common misconception that checking your own credit score can harm it. However, this is not true. Only “hard inquiries” of your credit report made by lenders when you apply for credit can have a minor, temporary impact on your score. “Soft inquiries” made when you check your own score have no effect. It is recommended to regularly monitor your credit score to identify and address any issues promptly.
Myth 2: Closing old accounts does not affect your score.
Closing old credit card accounts may seem like a logical way to improve your credit utilization ratio, but it can actually lower your score. This is because closing accounts reduces your total available credit and shortens your credit history. It is advisable to keep old accounts open and use them occasionally
Creditors like to see payment histories, if you close the account, it’s no longer calculated in your score. It would be similar to removing your work experience from your resume. Companies like to make decisions based on your past experiences.
Myth 3: Carrying a balance is necessary to build credit.
Contrary to popular belief, carrying a credit card balance does not contribute to building your credit score. In fact, maintaining a balance leads to additional interest charges. Paying your balance in full every month showcases responsible usage without incurring fees.
With that said, I wouldn’t recommend putting your credit cards in a drawer and never using them if you’re trying to improve your credit. Instead, use them at least once per month and pay them off if you want to maximize your credit scores.
Myth 4: Credit repair companies have the ability to instantly improve your credit score.
While it is possible to raise your credit score a few points by paying down some credit card balances, legitimate credit score improvements require time and responsible financial habits, despite the bold claims made by credit repair companies. It is important to be cautious of companies that make unrealistic guarantees, as there are no shortcuts.
Even if a legitimate credit repair company was able to remove an account from your report due to inaccuracies, the re-calculation of the score would take at least 30 days. Truly boosting your score can be achieved by consistently making on-time payments and maintaining low balances.
Myth 5: Closing Negative Accounts Will Remove Them from Your Report.
Late payments can stay on your credit report for up to 7 years, even after the account is closed. It is not recommended to close accounts solely to remove negative marks. It is more beneficial to concentrate on using credit products responsibly in the future.
Unless you can legitimately remove a negative mark due to an inaccuracy, it’s best to overwhelm the negative marks with positive ones! Keep your focus on how to make positive improvements rather than remove negative detractions. This article will help.
Myth 6: There is a common myth that suggests you have only one credit score.
There are as many as 14 credit scoring models or versions (see below) available, with FICO and VantageScore being two popular ones. Lenders utilize various scoring systems, so your credit score can vary from one industry to another (i.e. buying a car versus buying a home). Just monitor your score and reports regularly and know that your scores can vary with each model.
Myth 7: Your level of income will affect your credit score.
While income is taken into consideration when determining creditworthiness, it does not have a direct correlation with credit score calculations. Credit scores are based on your track record of responsible credit utilization, diversification of credit, and timely payments. Regardless of your income, you can establish a strong credit history through prudent financial management.
Having a clear understanding of credit scores enables individuals to effectively manage their credit. It is important to distinguish between facts and myths, regularly monitor credit reports, and consistently practice responsible financial habits. This approach is key to maintaining long-term credit health.
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