Credit score confusion: Understanding your credit score is vital for securing loans, credit cards, and even rental agreements. Yet, many people fall prey to widespread myths that can lead to poor financial choices. Here are ten common credit score myths and the truths that dispel them.
Myth 1: Checking your credit score lowers It
Fact: Regularly checking your credit score is essential for managing your financial health. This action is considered a “soft inquiry” and does not impact your score.
Unlike hard inquiries like applying for a loansoft inquiries can help you monitor your credit without any negative effects.
You can use free credit monitoring services to track your score regularly and catch any errors early.
Myth 2: Your monthly income influences your credit score
Fact: Contrary to popular belief, your income does not appear on your credit report and does not factor into your credit score calculation. Your credit score is determined by your credit behavior, including payment history and credit utilisation, regardless of how much you earn.
One should focus on maintaining good credit behavior like paying bills on time and keeping credit utilisation below 30% to improve your score.
Myth 3: Credit score is the only factor for loan approval
Fact: While a good credit score is crucial for favourable loan terms, it’s not the sole consideration. Lenders also assess your age, income stability, repayment capacity, and credit mix, among other factors, when deciding on credit applications.
Always prepare a comprehensive loan application that includes proof of income, job stability, and a well-structured financial plan to increase your approval chances.
Myth 4: Closing old accounts improves your score
Fact: Many believe that fewer credit cards mean a higher score, leading them to close older accounts. However, doing so can actually harm your credit score by shortening your credit history, which is an essential part of your credit profile.
Experts advise to keep old accounts open, especially those with positive payment histories, unless there’s a compelling reason to close them.
Myth 5: Debit cards help build a credit score
Fact: Using a debit card is akin to cash payments; it doesn’t contribute to your credit history. Only activities associated with credit accounts—like timely payments and credit utilisation—impact your credit score.
Consider getting a secured credit card or a credit-builder loan to establish or improve your credit score while making regular, timely payments.
Myth 6: Carrying a balance boosts your score
Fact: Holding a balance on your credit card is a misconception that can lead to unnecessary debt. In reality, paying your balance in full each month is the best way to maintain a healthy credit utilisation rate, positively influencing your score.
Always aim to pay your credit card balance in full each month to maintain a low credit utilisation rate and avoid interest charges.
Myth 7: A perfect credit score is essential
Fact: Aiming for a perfect score may be futile. Once your score reaches around 760 or above, you qualify for the best interest rates and terms available, meaning there’s little to gain from pursuing a perfect score.
Myth 8: Employers can access your credit score
Fact: While employers can pull credit reports for background checks, they do not see your credit score. Instead, they review your payment history and outstanding debt to gauge financial responsibility.
Myth 9: Student loans don’t affect my credit
Fact: Student loans play a big role in your credit profile. Late payments or defaults can severely damage your credit score, making it crucial to stay on top of these obligations.
Set up automatic payments or reminders to ensure timely payments, and consider refinancing options if interest rates are high.
Myth 10: Getting married merges credit scores
Fact: Marriage does not combine your credit scores. Each spouse retains their individual credit report, although joint applications for credit will consider both scores.
Communicate openly with your spouse about finances and consider creating a joint budget to manage shared financial goals effectively.
