Credit Score Myths
Maintaining a good credit score should be a prime concern for every American citizen. Not only does it put you in good stead for being accepted for loans, mortgages and credit cards; but it can also help you save huge amounts of money in the long run by netting you low interest rates because of your financial trustworthiness. With a growing number of employers also requesting to see credit reports of job applicants, having a poor credit score can also represent irresponsibility and hinder your chances of landing a good job. There are hundreds of credit score myths available on the internet, whether they are the overnight fixes to fix your credit in 24 hours or the shocking secret method that is preventing you from getting a good score. We debunk some of these myths in this article.
“The more you earn, the better your credit score.”
This myth is fundamentally false, as nowhere on your credit report is your income ever recorded. Even if it were a feature of your credit report, the credit score formula doesn’t take that figure into account and it cannot have any impact (positive or negative) on your score. The formula is designed to highlight your ability to keep up with credit, it applies the same to millionaires and blue collar workers.
“Avoiding credit will improve my credit score.”
A blank credit history is almost as bad as a negative credit score. If brokers and lenders cannot see an evident ability to keep up with repayments, they will see you as a high risk case and either charge large interest rates or refuse you credit altogether.
“Paying off my credit card will help my score.”
Whilst it certainly helps to have no outstanding payments and to be up to date on all of your current credit, paying off your loans and debts doesn’t cancel out any discrepancies in the past. Information can be held for up to 10 years, so if you borrow money to clear a debt; it won’t wipe the history of your previous late and missed repayments.
“Closing my credit card will lower my credit use and better my score.”
This isn’t necessarily true. As mentioned above, the history will remain on your credit history regardless of the current state of your account. In addition to this, the credit score formula also looks at the amount of available credit that you are currently using. Closing a credit card can reduce this available credit and increase the percentage of credit that you are currently using. For example, if you have 2 credit cards with a $5,000 limit, each of which have $1,000 outstanding; you will be using 20% of your available credit ($2,000 of $10,000.) If you were to pay off and close one of these cards or transfer the balance to a single card, you will skew the metrics and find yourself using a higher percentage; which the formula counts as negative.
“Ordering credit reports will count as credit inquiries.”
Your credit score is only affected by ‘hard’ inquiries, which are those made by creditors and lenders in order to assess your suitability for a loan, credit card etc. Pulling your own credit report is a still counted, but as a ‘soft’ inquiry and doesn’t affect your score.