Credit scores can seem mysterious. That’s because to some extent they are hidden and what makes up your score depends on the agency reporting it and the lender requesting it. This leaves a lot of room for speculation and credit score myths.
Credit Score Myths – What You Need to Know
The problem is that these myths can actually damage your credit score and make it more difficult to get a loan or good interest rates. Here are some of the more common myths.
1.) Your income – Many people think that the amount of money they make each year has an impact on their credit score, but this isn’t true. Your actual income is never reported to the credit agencies. In fact, it is never put on your credit report and it has no impact on your credit score.
The only time your income comes into play is if it isn’t large enough to pay your debts and bills. Then it would be the late payments or non-payments that would show up on your credit report and hurt your score and not your actual income.
2.) Closing credit cards accounts help your score – It kind of makes sense on the surface. It seems like if you have a bunch of credit cards your credit score would go down, so closing them should increase your score, but this isn’t true.
If you have a couple of credit cards that are paid off, the credit is still available to you to use. If you close the accounts, that credit goes away. This is a problem because your debt-to-credit ratio goes down.
Your debt-to-credit ratio is the difference between the amount you owe and the amount of credit you have available. For example, if you have $4,000 in debt and $15,000 in available credit, you have a 26 percent debt-to-credit ratio.
If you close a credit card account that has $7,000 available credit, then your debt-to-credit ratio increases to 57 percent. You need this percentage to be under 30 percent.
3.) You don’t need good credit because you aren’t applying for a loan – Even if you have no plans of buying a home or new car or applying for a credit card, you still need good credit.
Your credit score can affect your ability to get car insurance and the amount you pay. It can also have an impact on whether or not you can get a new job. Many employers check your credit score before hiring you.
Even car rental companies and banks check your credit score before deciding whether or not they will do business with you. This is one of the credit score myths that can really cause you problems in the long run.
4.) Your significant other’s good credit score is good enough – Unfortunately, your spouses’ score is his or hers alone. It can’t be transferred to you. If they were to die or you were to divorce, you’d be on your own, credit score wise.
Also, if the two of you want to buy a house or car, both of your credit scores will be checked, and if your credit is bad, it will keep both of you from being able to get financing or a good interest rate.
5.) You can’t get a loan with bad credit – This isn’t really true. What is true is that you won’t be able to get a loan with good interest rates and terms. If you have bad credit, you can still get a bad credit loan, but you will be paying a higher interest rate that can add thousands of dollars to your loan.
6.) Checking your credit report will ding your credit – There are two types of credit inquiries. These are called a hard inquiry and a soft inquiry. A hard inquiry is used when you apply for credit or a loan and these do drop your credit score.
A soft inquiry is what happens when you check your credit report. This type of inquiry does not ding your credit score. It’s important to know what’s going on in your credit report, so don’t let a fear of hurting your score stop you from doing so.
There are a lot of credit score myths out there, so be sure you know what is true and what isn’t. Understanding the difference can help you protect your credit score. Not knowing can do the exact opposite.
This information was brought to you by BetterLoanChoice
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