Understanding the importance of your credit score is essential for maintaining your financial stability. Your credit score directly impacts your borrowing ability and the interest rates available to you. In reality, there is still a lot of misinformation about credit scores, which can lead to confusion and errors when attempting to manage your credit and secure a personal loan. This article separates fact from fiction and dispels some common myths about credit scores.
Myth #1: Checking your credit score will lower it
Checking one’s credit score does not result in a decrease, contrary to the common misconception. That is simply a myth. However, this is not the case. When you check your credit score the moment you consider going for personal loans, it is considered a “soft inquiry.” Checking your credit score does not affect your score, and only “hard inquiries” from lenders or creditors can lower your score.
Myth #2: Closing credit cards will always improve your credit score
Although it may seem counterintuitive, closing a credit card account can hurt your credit score. When you use too much of your available credit, your credit utilization ratio increases. That can negatively impact your credit score and signal to loan providers that you are a riskier borrower and could affect your credit score. It’s important to remember that closing an old credit card account can negatively impact your credit score. It is because it can shorten the length of your credit history, which is a key factor in determining your score.
Myth #3: Carrying a balance on your credit card will improve your score
There is a common misconception that carrying a balance on credit cards can improve one’s credit scores. However, this belief is unfounded and incorrect. A balance can hurt your credit score because it increases your credit utilization. Paying your credit card bill monthly is important to avoid extra charges and keep your credit utilization low.
Myth #4: Your income affects your credit score
Your income does not directly impact your credit score, and credit bureaus cannot access your income information when calculating your score. However, lenders may consider your income when making loan decisions. Lenders consider several factors, such as your credit score, to ensure you can repay the loan, and they need to assess your creditworthiness before extending the loan to you.
Myth #5: Closing an account removes it from your credit report
Credit reports do not remove information from closed accounts; the account will remain on your report for up to 10 years. When considering whether to close an account, it is important to remember this. Suppose you have a history of on-time payments and a low credit utilization ratio on an account. In that case, it may be better to keep it open to maintain a positive credit history. It is not a lesser-known fact that maintaining a positive credit history will enhance your chances of getting approved for loans.
Myth #6: You only have one credit score
Lenders may use multiple credit scores when evaluating your creditworthiness before approving your instant loan application. There are three primary credit bureaus: Equifax, Experian, and TransUnion. Each of these bureaus has its credit scoring model. There are other credit scoring models, such as the FICO score and VantageScore, which lenders commonly use. You must check your credit reports regularly and monitor your scores from each bureau to ensure accuracy and identify any potential errors.
Myth #7: Credit repair companies can instantly fix your credit score
Many credit repair companies promise to resolve credit score problems swiftly, but the truth is that repairing credit requires time and effort. Several companies charge exorbitant fees for services you can easily manage, like disputing inaccuracies on your credit report. To ensure good credit, it’s important to take a proactive approach by regularly checking your credit reports and scores, paying your bills on time, and maintaining a low credit utilization ratio.
In conclusion, many myths about your credit score can cause confusion and errors. Your financial stability needs to have a good credit score. You may manage your credit well by distinguishing reality from myth and making informed judgments.