Credit Score Confusion: Understanding your credit score is vital for obtaining loans, credit cards, and even rental agreements. However, many people fall prey to widespread myths that can lead to poor financial decisions. Here are ten common credit score myths and the truths that dispel them.
Myth 1: Checking your credit score lowers it
Made: Regularly checking your credit score is essential to managing your financial health. This action is considered a “soft query” and does not affect your score.
Unlike hard inquiries, such as applying for a loan, soft 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 in time.
Myth 2: Your monthly income influences your credit score
Made: Contrary to popular belief, your income does not appear on your credit report and is not taken into account in calculating your credit score. Your credit score is determined by your credit behavior, including payment history and credit utilization, regardless of how much you earn.
One should focus on maintaining good credit behavior such as paying bills on time and keeping credit utilization below 30% to improve your score.
Myth 3: Credit score is the only factor for loan approval
Made: While a good credit score is crucial to obtaining favorable loan terms, it is not the only consideration. Lenders also evaluate your age, income stability, ability to pay, and credit mix, among other factors, when deciding on credit applications.
Always prepare a complete loan application that includes proof of income, job stability, and a well-structured financial plan to increase your chances of approval.
Myth 4: Closing old accounts improves your score
Made: Many believe that fewer credit cards means a higher score, leading them to close older accounts. However, doing so can actually damage your credit score by shortening your credit history, which is an essential part of your credit profile.
Experts advise keeping old accounts open, especially those with positive payment histories, unless there is a compelling reason to close them.
Myth 5: Debit cards help build a credit score
Made: Using a debit card is similar to paying with cash; It does not contribute to your credit history. Only activities associated with credit accounts, such as timely payments and credit utilization, affect your credit score.
Consider getting a secured credit card or credit builder loan to establish or improve your credit score while making regular, on-time payments.
Myth 6: Carrying a balance increases your score
Made: Carrying 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 utilization rate, which positively influences your score.
Always try to pay your credit card balance in full each month to maintain a low credit utilization rate and avoid interest charges.
Myth 7: A perfect credit score is essential
Made: Aiming for a perfect score can be futile. Once your score reaches around 760 or higher, you’ll qualify for the best interest rates and terms available, meaning there’s little to gain by chasing a perfect score.
Myth 8: Employers can access your credit score
Made: While employers can pull credit reports to check your background, they don’t see your credit score. Instead, they review your payment history and outstanding debt to assess your financial responsibility.
Myth 9: Student loans don’t affect my credit
Made: Student loans play an important role in your credit profile. Late payments or defaults can seriously damage your credit score, so it’s critical 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
Made: Marriage does not combine your credit scores. Each spouse keeps their individual credit report, although joint credit applications will consider both scores.
Communicate openly with your spouse about finances and consider creating a joint budget to manage shared financial goals effectively.
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