There are a lot of misconceptions going around about people’s credit scores. From things that have zero impact on their scores to details that do impact their score, people fall for all kinds of rumors. Let’s see the credit score myths that are most likely to affect a user’s credit history.
Myth no. 1: Income Affects My Credit Score
This one is the number one myth about credit scores. Around 2 in 3 consumers fall for it. People think the more generous their salary is, the greater their score should be. But a person’s income isn’t even featured on their credit report. And credit scores are calculated based on that report.
The only people interested in your income are lenders. So, expect the question to pop up whenever you are applying for new credit.
Myth no. 2: I’m Forever Stuck with a Bad Score
A bad credit score is not a life sentence. If you make wise financial choices, the score will gradually improve. Things, like paying your taxes and bills on time and not maxing out your cards, can improve your score. This way, you are telling potential lenders that you are responsible with your money.
The negatives on your credit report do stay there for up to seven years. But you don’t have to worry about a poor financial decision you made more than a decade ago.
Myth no. 3: Debit Cards Are Good for My Score
Debit cards only allow you to withdraw money from your banking account. They show nothing about how you can manage credit. That’s what credit cards are good for. Debit cards don’t appear on your credit report either, so they don’t affect your score.
Myth 4. New Credit Cards Can’t Affect My Score
One in three credit card owners believes this myth. Adding new credit cards to your portfolio can impact your score indirectly. For instance, whenever you apply for a new credit card, the bank will perform a hard check on you. The more credit checks within a short time frame, the lower your score. It is not healthy to have more than two hard credit inquiries over one year.
Such inquiries are performed whenever you want to borrow money, be it a personal loan or mortgage application. It is best to apply only for the credit you are 100% confident you’ll get approved for.
Myth no. 5. Shopping Around for Credit Affects My Score
When asking for a quote to see what offer is best for you, you are not actually applying for new credit. The lender may perform a so-called “soft check,” which doesn’t affect your score.
Myth no. 6. Checking My Credit Score or Credit Report Affects My Score
People fall for this one because they mistake soft checks for hard credit checks. It is a consumer’s right to keep an eye on his or her credit score and credit history. This way, they can make sure that they manage their credit well.
Important note: Check your score and credit report only through a credit reference agency, such as Experian and TransUnion. Don’t do it through a lender while applying for credit (see Myth no.2), unless you want your score to dip.
Myth no. 7. Bad Credit Score Will Bar Me from Getting Any Credit
A bad credit score doesn’t mean that all your credit applications will get rejected by default. Some lenders may need more info on your income or debt amount before approving your application. A bad score means that you won’t be approved for a loan or credit card that easily.
A bad score also means that you’re considered high risk. Lenders may need a safety net to ensure they get their money back from high-risk customers. For instance, some banks ask for a security deposit. Most online lenders charge their customers higher interest rates.
The lending market is diverse enough, though, for you to find a great deal. If you need money for an emergency expenditure, you can always tap the online lending market. There are even credit opportunities for bad credit scores. Just read more about the best loans online before applying for new credit, and find out how to get cheap debt.
Myth no. 8. Closing Out Older Credit Cards Is Good for My Score
Around 30% of credit card users fall for this trap. Closing out the credit cards you no longer use can impact your score. First, if the credit card is old, closing it will shorten your credit history. Short credit history is bad for your score.
Second, most credit scoring agencies look at the “credit utilization” rate to calculate creditworthiness. This means that the available credit you are using has a stronger say than your credit amount.
For example, let’s say your total credit card limit on two cards is £6,000. And you have £2,000 on one card and £0 on the other. If you decide to close out the card with zero balance, your total credit utilization will jump from 30% (£6,000/£2,000) to 67% (£3000/£2000), which is bad for your score.
Myth no. 9. Good Bank Balance Is Good for My Score
Having a lot of money stashed in the bank only means that you are not a big spender. It doesn’t tell anything about your creditworthiness. Making timely payments and not getting into too much debt prop up your score. Long and consistent credit history also helps (see next myth).
You can have great bank balances and a lousy credit score just because you failed to pay your bills on time.
Myth no. 10. Zero Credit Card Debt Means Great Credit Score
Nearly one in four credit card users believe this myth. Credit card debt has often been vilified, which may explain the situation. But zero balance on your credit card means that your credit history stops. To further build it, you need to make timely payments in a consistent matter.
Mortgage payments and personal loan payments can contribute to good credit history, as well. But active credit cards will speed the process up.
Ultimately, having a good credit score usually depends on how consistent you are with payments, not if you don’t have credit lines. It may sound counterintuitive, but your credit score will always benefit from a small loan you reimburse in a timely manner more than you having a generous paycheck.