Credit scores are essential to modern financial life. Whether you’re applying for a loan, renting an apartment, or even getting a job, your credit score can play a significant role in the opportunities available to you.
Despite their importance, many misconceptions exist about how credit scores work and what factors impact them.
Below, we’ll debunk some of the most common myths about credit scores and provide the information you need to make informed decisions about your financial health. So, let’s separate fact from fiction regarding credit scores.
Myth 1: Checking Your Credit Score Lowers It.
Many people believe that checking their credit score will cause it to decrease, but this is a common myth. Checking your credit score is known as a credit inquiry, and it can have different effects on your score depending on the type of inquiry.
There are two types of credit inquiries.
- Soft inquiries: A soft inquiry occurs when you check your credit score, and it does not affect your credit score. When companies check your credit score for pre-approved offers or background checks, soft inquiries can also occur.
- Hard inquiries: On the other hand, a hard inquiry occurs when a lender or creditor checks your credit score to assess your creditworthiness for a loan or credit card. Hard inquiries can lower your credit score by a few points, but the effect is usually temporary and typically lasts up to two years.
Regularly monitoring your credit score is essential as it can give you an idea of your overall creditworthiness and alert you to any errors or fraudulent activity on your credit report.
By monitoring your credit score and reviewing your credit report regularly, you can ensure that your credit history is accurate and up-to-date, which can help you to maintain a good credit score over time.
Myth 2: Your Income Affects Your Credit Score.
Another common myth about credit scores is that your income level affects your score. However, your income is not a factor that is directly considered when calculating your credit score.
Credit scores are determined based on several factors, including
- Payment history: Likely the most crucial factor and refers to whether you make your payments on time
- Credit utilization: How much of your credit have you used
- Length of credit history
- Types of credit: Credit cards, car loans, home loans, etc.
- Recent credit inquiries
While your income does not directly impact your credit score, it can indirectly affect it by influencing your ability to make timely payments.
If you have a higher income, you may be able to make payments on time more easily than someone with a lower income.
However, regardless of your income level, making your payments on time and in full is essential to avoid negative marks on your credit report and maintain a good credit score.
In summary, while income is not a direct factor in calculating your credit score, it can indirectly affect it by influencing your ability to make timely payments. Therefore, it’s important to prioritize paying your bills on time, regardless of your income level.
Myth 3: Closing Credit Card Accounts Improve Your Credit Score.
Another common myth about credit scores is that closing credit card accounts can improve your score. However, closing credit card accounts can have the opposite effect on your credit score, particularly when it comes to credit utilization.
Credit utilization is the amount of credit you’re using compared to the total amount available.
This is a key factor in determining your credit score, as lenders and creditors want to see that you’re using credit responsibly and not maxing out your credit cards.
When you close a credit card account, you reduce the amount of credit available to you, which can increase your credit utilization ratio. This, in turn, can lower your credit score.
Keeping your credit card accounts open is generally a good idea, even if you’re not using them regularly. This can help to maintain your available credit and improve your credit utilization ratio.
However, if you have too many credit cards or are struggling to manage your debt, it’s important to take steps to manage your credit utilization.
- One way to do this is to pay down your balances and avoid carrying high balances on your credit cards.
- You can also consider increasing your credit limit or opening a new credit card account to increase your available credit. However, it’s essential to use credit responsibly and not take on more debt than you can handle.
Myth 4: Your Credit Score Only Matters When Applying for Loans.
The next myth about credit scores is that they only matter when applying for loans. In reality, credit scores are used in a variety of situations beyond just applying for credit or loans.
- For example, landlords and property managers often check credit scores as part of the application process for renting an apartment or house.
- Employers may also check credit scores as part of a background check when hiring for certain positions.
- Credit scores can also affect your insurance premiums. Insurance companies often use credit scores to help determine the likelihood that you’ll file a claim. Those with higher credit scores may be seen as less of a risk and may receive lower insurance premiums.
Maintaining a good credit score is important because it can impact many areas of your everyday life beyond just obtaining credit.
Myth 5: Bad Credit Lasts Forever.
The final myth about credit scores is that bad credit lasts forever. While negative information can stay on your credit report for several years, your credit score is not set in stone and can be improved with time and effort.
Credit scores are calculated based on several factors, including payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. This means that even if you have a history of late payments or collections, you can still take steps to improve your score over time.
Focusing on factors within your control is essential to improving a bad credit score.
- Make all of your payments on time
- Pay down any outstanding debts
- Keep your credit utilization low
- Avoid applying for too much credit at once
While improving a bad credit score takes time and effort, taking action as soon as possible is important.
The longer you wait to address your credit issues, the more difficult it can be to improve your score. It’s also important to be patient and consistent, as improving your credit score is a gradual process that may take several months or even years.
In summary, bad credit does not last forever, and you can improve it with time and effort. By focusing on the factors within your control and taking consistent action to improve your credit score, you can set yourself up for a brighter financial future.
Credit scores play an essential role in our financial lives, and it’s crucial to understand how they work. By dispelling common credit score myths and staying informed about managing your credit effectively, you can set yourself up for a successful financial future.
Featured Image Credit: patrick.daxenbichler /Depositphotos.com.
This article originally appeared on Ash & Pri.