Credit score is becoming more and more important as the world is increasingly becoming cashless. It is imperative that anyone wishing to build and maintain a good credit score be familiar with the details of how credit score works. While there is no shortage of information on credit opportunities and scores, there also seem to be many myths surrounding the subject. Some of these prevalent credit score myths are quite amusing while some, if not fixed quickly, can also be harmful in the long-run.
1. Carrying a balance on the credit card is good for my score
As false as it may be, this credit score myth has has been around for so long because the usual reason behind it makes logical sense. People believe that since credit agencies and banks make money when you keep balances on your credit card, they prefer to loan to those consumers who pay more interest. However, this is absolutely not true. Balances on credit cards have serious potential to harm your credit score and it also becomes more and more expensive over time. Secondly, if you can make payments on time and avoid interest payments, that is in fact the way to boost your credit score.
2. Credit score is impacted by my income level
This is also not true, but here you need to remember another factor – What you do with your income does impact your score. Your income level will determine your ability to borrow and pay bills, but it will not determine your credit risk and neither your credit score. Your income level is not mentioned on your credit report at all and other wealth metrics are not used for credit scoring either. So now circling back to ‘what you do with your income’ factor, the payments you make and the general credit habits that you keep with whatever income levels you have will impact your credit score.
3. If I use Debit cards, I can improve my credit score
Debit card usage is just the direct alternative to carrying cash-in-hand. There is no credit involved and therefore no impact on your credit scores either. Forbes mentioned that approximately 44% of people believe in this credit score myth. The truth, however, is that if you prefer direct cash dealings – even if you click on ‘credit’ for online shopping it is not counted as credit – there is no negative impact on your credit score either. This last point is relevant for the next myth on the list.
4. Getting more credit cards will not harm my score
It does, and in multiple ways. When you apply for a new credit card, or a new loan otherwise, the lenders take account of your previous debts. Scattered and infrequent credit dealings will not affect your credit score by much, but if you have several borrowings and are still applying for a new credit card, it might signal that you don’t have the capacity to make your payments without a loan. This does not directly mean that your application for a new credit card will be rejected. But it does mean that under such circumstances, if a new credit card is issued, it will reduce your credit score.
5. Getting rid of credit altogether will improve my score
Now keeping in line the above two factors, getting rid of credit might seem like the perfect solution. However, this is also a major credit score myth. Your credit score is determined by the ratio of total available credit to your outstanding credit. You need some credit in the first place to have a credit score, be it in the form of a loan or a credit card. The only way to improve or build a good credit score is to have a line of credit and then keep the balances low.
6. Paying off collections will improve my score
It is not simply true that paying off collections will improve my score because of the fact that even if you clear your outstanding balances, it does not delete the negative amounts that you had accumulated in the past. Maintaining those balances will definitely lower your score, but clearing them will not necessarily be enough to recover the credit score.
7. Joint credit will mean joint score
Many people believe that, for instance when they get married or start a business partnership, their credit becomes automatically joint and so does their score. This is only true if you have never borrowed before and your first borrowing comes with a co-signer or as a dependent borrower. Secondly, a marriage or a business partnership does not automatically lead to joint credit either. You need to get on board your partners for your credit officially for a debt to become the joint responsibility of both, or more, partners.
8. An ex-partner will not affect my credit score
This is similar to the above mentioned factor. Just like you getting married does not automatically make your loans a joint responsibility, you getting divorced also do not automatically absolve you of the previously taken on responsibility. If you borrowed a loan on a joint application, and you or your ex-spouse does not make timely payments, it will still impact both your credit scores negatively.
9. If I keep inquiring my credit score, it will take a hit
This is an extremely common misconception, especially among credit card owners. They think that if they keep checking their credit score, it will count as a negative marking. However, if you heard this from your parents or grandparents, know that they were not wrong either. Once upon a time this used to be true but it stopped being so several years ago. Just be careful that you are using an accredited credit scoring service to check your score and not going through a mortgage lender. That is important because a mortgage lender checking your score will count as an inquiry for a newly applied loan.
10. I have only one credit score
Finally, if you believe that there is only one particular score that marks the heading of your credit reports, you are mistaken. Since different lending agencies use different models and different determinants of an applicant’s credit scores, the eventual results of those models also differ. This is important to remember because the score that your bank told you might not be the same that your home loan lender might consider. So being mindful of that will be helpful while applying for loans or carrying out other credit transactions.