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Common Credit Score Myths

Common Credit Score Myths

common credit score myths

A good credit score is important not just as a sign of your overall financial picture, when applying for the best travel credit cards or mortgage.  Thanks to the world wide web, there is a lot more information on credits scores available.  Unfortunately, some people still hold on to some bad misconceptions about credit scores.  Here are just a few common credit score myths and the truth about each.

1.  Carrying a balance on my credit card will improve my scores

False.  This is one of the most common credit score myths.  A credit card balance not only doesn’t help your score, but it can potentially hurt it and cost you more money in the long run.  If you have a balance, you get charged interest. And the longer the balance remains, you will end up paying interest on interest.  Unless you cannot afford to pay off your bill monthly, it’s a complete waste of money to pay interest.  Credit card balances also affect your utilisation rate, which counts for 10% of credit score calculation.  If you have a balance, consider opening a balance transfer credit card.  The Discover it Miles has an introductory 0% APR for 14 months.

2.  Checking my credit report can lower my credit scores

You can check your credit report as many times as you like.  In fact, annualcreditreport provides weekly reports from all 3 credit bureaus.  Checking your own report is considered a ‘soft pull/inquiry.’  Soft inquiries remain on your credit report for up to 2 years, can only be seen by you, and do not impact your credit score.  However, applying for a credit card is  considered a hard pull and will potentially lower your scores.  In fact, having too many hard inquiries on a credit report makes you look like you’re desperate for credit.

3.  My salary impact my credit scores

Income and bank account balances are not factors in credit scores.  How much money you have has an indirect effect on your scores.  However, paying bills does factor into credit score calculation, which IS impacted by income.  Credit scores are just a measure of risk.  Having a lot of money doesn’t guarantee high credit lines.  Payment history, amount of debt, length of credit history, credit mix, and hard inquiries all directly affect credit scores.

4.  Paying off debt increases credit score

This one is true for credit card debt for false for instalment debt like student loans.  Paying off a student loan won’t increase your scores.  Unfortunately, it can have the opposite effect.  Your scores can actually decrease because you will be having fewer credit mix.  Paying off a credit card will not only save you money on interest, but improves scores by lowering your credit utilisation.

5.  Student loans don’t affect my scores

Student loans are instalment loans and are thus included in credit reports and scoring.  Credit scores are not just impacted by credit card bills, but utilities, mortgage, medical bills can serious damage scores if left unpaid.  A missed payment from a student loan can still affect your scores years later.  A default can be catastrophic.

6.  Closing a credit card improves my credit score

False.  This will more likely hurt your credit score than help it.  Leaving an account open, especially one with a good payment history, is better for your scores.  Not only does it contribute to your payment history, but increases your credit age.  In particular, if the card doesn’t have an annual fee, use it once in a while just to keep it open.  Closing a card only makes sense if it carries a high APR.

7.  A perfect score doesn’t matter

True.  A perfect credit score of 850 might be good for boasting purposes.  Once you reach 760+, you get the same benefits and qualify for the same loans and credit as people with perfect scores.  There are no added benefits.

8.  Paying off a debt collection will help my credit score

A debt collection is a severely past-due account that has very bad effect on credit scores.  Once a collection is reported on your credit report, it factors into your credit score until the 7 year limit is over.  However, paying a collection will have a positive effect on your scores later on, but just not immediately.  The only way to improve your scores is to try to negotiate with the collections agency and have it removed.

9.  It takes a long time to a improve bad credit score

It’s true, a few months can be enough to ruin good credit, while restoring that good credit will probably take longer.  Charge-offs, bankruptcies, collections can ruin credit scores.  Most negative information stays on your credit report for 7 years, but has a lesser impact as time goes on.  For collections and charge-offs, you can sometimes negotiate with the debt collections to pay in exchange for removal.  While waiting for negative info to fall off, continue to make timely payments, keep your debt under control, and other ways to improve your credit score.

10.  You can use debit cards to build your credit score

One of the common credit score myths among young people.  Credit cards and debit cards are 2 completely different things.  Debit cards are linked to your checking account and your limit is what’s available in that account.  They have no effect on credit scores whatsoever.  Credit cards, on the other hand, allow you to borrow/get credit from a bank.  They, however, have an impact on credit scores.

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