Probably, one of the big pieces of your financial life is your credit score. This will determine the type of loan you will be approved for and how favorable the interest rates may be, and may even unlock certain job opportunities for you.
About this, several misconceptions have been made to date in regard to what actually goes into determining your credit score. Let us debunk a few common myths and get it right on what actually affects your credit score.
Myth 1: Checking Your Credit Score Harms It
Fact
This does not harm your score when you check your own credit score. There exist two types of credit inquiries: one is hard, while the other is soft. Soft inquiries happen with inquiries on your own credit score or when banks access the same for pre-approval offers. These do not affect your score.
The hard inquiries are those that happen upon an application being filled out for unused credit, such as a credit card or credit; this slightly lowers your score. The impact is usually minor and short-lived, shaving off as little as a few points.
Either way, however, a few hard inquiries in a very short period can make the banks take notice that you’re after a chunk of new credit, which is going to ding your score a lot more seriously.
Myth 2: Closing Old Accounts Will Give You a Better Score
Truth
Actually, closing old credit accounts can hurt your credit score. Of the big factors in your credit score, the age of your credit history is a big deal, and older accounts tend to add weight to the age of it.
When you shut down an older account, you reduce the average age of the rest-and that can hurt your score.
Closing an account also reduces your total available credit, which increases your credit utilization ratio—a key factor in determining scores.
Credit utilization includes how much credit you are using compared to the total amount available to you. The higher that utilization ratio, the worse for your score—and generally much better it is to keep old accounts open, even if you don’t use them very often.
Myth 3: You Have One Credit Score
Reality
You have a whole load of them. Because there are different credit reports for the different credit bureaus, Equifax, Experian, and TransUnion—each probably with a different credit-scoring model—your credit score can be different from one reporting bureau to another and even from one scoring model to another.
Second, most lenders use specialized credit-scoring models that cater to specific sorts of credit, such as mortgage or auto loans.
For the future, at any given moment, there may be a number of different credit scores on you, and those that refer to different bureaus or different types of credit are by no means identical.
Myth 4: Paying Off a Debt Removes It from Your Credit Report
Myth
A debt, when paid, disappears from the view of your credit report.
Paid Liabilities
Although the paid liabilities remain in your credit report for as long as seven years, they are labeled as ‘paid’ and hence reflect positively in your credit history.
The presence of any paid liabilities, more so those which had defaulted earlier, shows the lenders that you have cleared your financial liabilities and may be supportive for your credit profile.
In any case, negative things, for example, late installments or collections, stay on your report for seven a very long time from the date of the introductory missed installment, regardless of whether the obligation is paid off.
Myth 5: Carrying a Little Adjustment on Your Credit Card Is Far Better Than Paying It Off Completely
Truth
It is always better to pay off your credit card adjustment in full every month. Credit utilization is the ratio of credit card balances to credit limits, a big determinant of your credit score. Paying carrying-forward adjustment keeps credit utilization low.
To some, carrying a small balance every month may seem a good and responsible use of credit, but that is also another myth. Paying the balance in full helps lenders prove that you can handle your credit and it saves you from interest charges over your purchases.
Myth 6: Income Affects Your Credit Score
Reality
Income itself has no bearing on your credit score. These credit-scoring models are based on a set of your credit behaviors, including your payment history, utilization of credit, length of credit history, inquiries about new credit, and your credit mix.
Although pay is important for lenders in deciding upon your repaying capability, it does not relate to your credit score. In considering your application for credit, your income might be taken into consideration, but strictly speaking of the score itself, it only applies to your history and behavior concerning credit.
Myth 7: It Won’t Affect Your Credit If You Co-Sign
Reality
Co-signing in a loan means you fall completely into debt liability; this is to say that on default or late payment of the loan, it decreases your credit rating. Cosigning links your credit history with the financial practice of the primary borrower.
Be careful: Before you cosign, be sure you are comfortable with the financial responsibility and possible impact on your credit. If the borrower manages the advance well, it may surely reflect in your credit report, but the chance of negative affect is colossal.
Conclusion
Understanding these popular credit score myths will help one make smart decisions in managing his or her credit; keep an eye on a good payment history and keep your credit utilization low will be judicious, along with an unused credit request.
Pull your credit reports on a regular basis from all three major bureaus for accuracy and also catch any potential problems early.
With these popular myths now set straight and having zeroed in on those things that really do affect your credit score, it would be full steam ahead in building up and maintaining a good credit rating.
If you have more concrete questions or need further explanation, then a financial adviser or credit counsellor would be the place to go. After all, as the common saying goes, when it comes to your budgetary well-being, information is power.
