Credit Score Myths: Debunked and Explained
It determines whether you get approved for loans, credit cards, and even rental applications. However, there are many myths surrounding credit scores that can cause confusion and lead to poor decisions. In this post, we’ll explore and debunk some of the most common credit score myths and explain what actually affects your score. From the impact of checking your credit score to the effect of closing a credit card account, we’ll cover it all. By understanding the truth behind these myths, you can take control of your credit score and make informed decisions that will help you achieve your financial goals. So, let’s get started!
- Introduction to credit score
Your credit score is one of the most important factors that financial institutions, banks, and lenders consider when deciding whether to approve your application for a loan or credit card. A credit score is essentially a numerical representation of your creditworthiness, which is based on your past credit performance and payment history.
Your credit score can range from 300 to 850, and the higher your score, the more likely you are to be approved for credit and receive favorable terms and rates.
However, there are many myths and misconceptions about credit scores that can lead to confusion and misunderstanding. In this blog post, we will debunk and explain some of the most common credit score myths to help you better understand how credit scores work and how to improve your credit score.
- Myth #1: Checking your credit score will hurt it
One of the most common credit score myths out there is that checking your credit score will hurt it. This is simply not true!
Checking your credit score is considered a “soft inquiry” and does not negatively impact your credit score. In fact, it’s a good idea to check your credit score regularly so that you can stay on top of any changes or errors.
However, it’s important to note that applying for credit cards or loans will result in a “hard inquiry”, which can temporarily lower your credit score by a few points. This is because applying for credit can signal to lenders that you are in need of credit and may be a higher risk borrower.
So, while checking your credit score won’t hurt it, it’s important to be mindful of applying for credit too frequently. This is one reason why it’s important to do your research and only apply for credit when you really need it and are confident that you will be approved.
- Myth #2: Income affects credit score
One of the most common myths about credit scores is that your income plays a crucial role in determining it. However, this is not true at all. Your income is not a factor that is considered when calculating your credit score. Your credit score is calculated based on your credit report, which includes information about your credit history, such as your payment history, credit utilization, length of credit history, and types of credit accounts you have.
It’s important to understand that while income may not directly affect your credit score, it can indirectly affect your ability to obtain credit. When you apply for a loan or a credit card, lenders will consider your income as one of the factors in determining your creditworthiness. If you have a high income, lenders may view you as less risky because they assume you have the means to pay back debt. On the other hand, if you have a low income or no income, lenders may view you as more risky and may be hesitant to approve your application.
It’s also worth noting that having a high income does not automatically guarantee a good credit score. Your credit score is based on your credit history and behavior, so even if you have a high income, if you have a history of missed payments or high credit utilization, your credit score will likely be lower.
- Myth #3: Closing credit accounts will improve credit score
Many people believe that closing a credit account will improve their credit score. However, this is a common credit score myth that is not only false but can actually harm your credit score.
When you close a credit account, you reduce your overall available credit. This means that the ratio of your credit usage to your available credit will increase, which can negatively impact your credit score.
In addition, closing a credit account can affect the length of your credit history. If you close an old credit account, it can shorten your credit history and lower your credit score.
It’s important to note that closing a credit account may be necessary in some cases, such as if the account has an annual fee that you don’t want to pay. In this case, it’s best to close the account strategically and not all at once. For example, you can close one account at a time over a period of a few months instead of closing multiple accounts at once.
In conclusion, closing credit accounts is not a good strategy to improve your credit score. Instead, focus on paying your bills on time, keeping your credit utilization low, and maintaining a healthy credit history.
- Myth #4: Credit score affects employment opportunities
A common myth surrounding credit scores is that they can impact your employment opportunities. This is simply not true. Your credit score is not a factor that employers consider when making hiring decisions. In fact, it is illegal for employers to check your credit score during the hiring process without your explicit permission.
However, there are some industries where credit checks are required, such as finance or government positions that require security clearances. In these cases, the credit check is to ensure that the candidate is financially responsible and does not have any outstanding debts that could lead to potential conflicts of interest or security breaches.
It is important to note that a potential employer can request a background check, which may include a credit check, but this is different from a credit score check. A background check looks at a candidate’s criminal history, education, work experience, and credit history, but it does not provide the employer with the candidate’s credit score.
In summary, while it is important to maintain a good credit score for personal financial reasons, it is not something that can impact your employment opportunities in most cases.
- Myth #5: Credit scores are all the same
One major myth about credit scores is the belief that all credit scores are the same. This is not true. There are actually several different types of credit scores, such as FICO scores, VantageScore, and TransRisk scores, which are all calculated differently and can provide different results.
For example, FICO scores are the most commonly used credit scores, which are used by lenders to determine creditworthiness. It ranges from 300 to 850, with a higher score indicating good credit and lower indicating bad credit. VantageScore, on the other hand, ranges from 501 to 990, and TransRisk scores range from 100 to 900.
It’s important to note that the credit score you receive may vary depending on the credit bureau providing the score and the type of credit score used. Additionally, different lenders may use different credit scores, so it’s important to understand the type of credit score being used when applying for credit or loans.
To ensure accuracy and avoid confusion, it’s a good idea to check your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion) and compare the scores to ensure they are consistent.
- Myth #6: Paying off debts will improve credit score immediately
One of the biggest myths regarding credit scores is that paying off your debts will immediately improve your credit score. While paying off your debts is a responsible financial decision, it may take some time for your credit score to reflect this positive change.
When you pay off your debts, your credit utilization ratio decreases. This ratio is a measure of how much credit you are currently using compared to your overall credit limit. According to credit bureaus, a lower credit utilization ratio is a good indicator of responsible credit management. As a result, paying off your debts can have a positive impact on your credit score, but it’s not an immediate fix.
Credit bureaus calculate your credit score based on a variety of factors, including payment history, credit utilization, length of credit history, and types of credit. It’s important to note that paying off your debts only affects one of these factors, which means that it may take some time for your credit score to reflect this positive change.
Moreover, some debts have a higher impact on your credit score than others. For example, credit card debt can have a bigger impact on your credit score than student loan debt or a car loan. So, paying off your credit card debts can have a more significant effect on your credit score, but again, it may take some time to see the results.
In conclusion, while paying off your debts is a smart financial decision, it’s important to understand that it may take time to see the results on your credit score. Don’t get discouraged if you don’t see an immediate improvement, continue to practice responsible credit management, and over time, you’ll see your credit score start to rise.
- Myth #7: Age affects credit score
One of the most common myths surrounding credit scores is that age affects it. The truth is that age does not impact your credit score directly. What does affect your credit score is your credit history, which is essentially a record of all your credit-related activities.
Your credit history is made up of a variety of factors, including how long you’ve had credit accounts open, your payment history, the types of credit accounts you have, and the amount of debt you owe. These factors all play a role in determining your credit score, but none of them are directly tied to your age.
In fact, having a longer credit history can actually work in your favor, as it shows lenders that you have a proven track record of managing credit responsibly. However, it’s important to note that if you’re new to credit, it may take some time to build up a solid credit history and see an improvement in your credit score.
Instead, focus on building a solid credit history by making payments on time, keeping your credit utilization low, and avoiding opening too many credit accounts at once. By doing so, you’ll be well on your way to achieving a healthy credit score – regardless of your age.
- How to build and maintain a good credit score
Building and maintaining a good credit score is essential for financial stability. A good credit score can mean lower interest rates, higher credit limits, and even better insurance rates. You can request a free credit report every year from each of the three major credit bureaus.
Remember, building a good credit score takes time and effort, but it is worth it in the long run.
- Conclusion & final thoughts
In conclusion, it’s important to note that understanding your credit score can be a complex process, but it’s not something that should be feared or misunderstood. By debunking these common credit score myths, we hope we’ve shed some light on how credit scores are calculated and how you can improve your score.
Remember, checking your credit score regularly is crucial to ensuring accuracy and detecting any errors that could negatively impact your score. You’re entitled to one free credit report per year from each of the three major credit bureaus – take advantage of this and review your reports for any discrepancies.
It’s also important to make timely payments, keep your credit utilization low, and avoid opening too many new credit accounts at once. These actions will help demonstrate responsible credit behavior and ultimately lead to a higher credit score.
By taking control of your credit and understanding the factors that influence your score, you’ll be on your way to achieving your financial goals and building a better financial future.