The significance of one’s credit score is widely recognized. It is becoming increasingly important to effectively manage and comprehend your credit score in order to enhance your credit prospects. Nevertheless, there are numerous misconceptions that exist, often resulting in financial mistakes.
Your credit score provides you with the opportunity to obtain convenient and affordable credit, as well as various financial products. Without a favorable credit score, it can be difficult to access the funds you may require throughout your lifetime. However, numerous falsehoods have been propagated regarding this score. Let us dispel these misconceptions and assist you in making better-informed choices.
Myth 1: Checking Your Own Credit Score Lowers It
A common misconception is that viewing your own credit score will harm it. This misunderstanding stems from the distinction between a ‘hard inquiry’ and a ‘soft inquiry.’ Reviewing your own credit score constitutes a soft inquiry and has no impact on your credit score. Conversely, when creditors assess your credit report for loan or credit card approval, it results in a hard inquiry that may slightly affect your score. It is advisable to routinely monitor your credit score to verify its accuracy and identify any possible problems promptly.
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Myth 2: Closing a Credit Card Improves Your Credit Score
Many people believe that closing an unused credit card will boost their credit score. In reality, this action can often have the opposite effect. Your credit utilization ratio, which is the amount of credit you’re using compared to the total credit available to you, plays a significant role in determining your credit score. Closing a credit card reduces your available credit and can increase your credit utilisation ratio, potentially lowering your score. It’s generally better to keep the card open, especially if it has a long credit history and no annual fee.
Myth 3: A Higher Income Equates to a Higher Credit Score
Income is not directly considered when calculating your credit score. Credit scores are determined by your credit behaviour, such as payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries. While a higher income can help you manage debt better and may make lenders view you as less risky, it does not directly impact your credit score.
Myth 4: Paying Off Debt Removes It from Your Credit Report
Paying off debt is crucial for maintaining a healthy credit score, but it doesn’t erase the debt from your credit report immediately. The information about your loans and their repayment history remains on your credit report for several years. For instance, settled accounts remain on the report for up to seven years. This history helps lenders assess your creditworthiness over time.
Myth 5: Debit Card Usage Helps Build Credit Score
Using a debit card does not help build your credit score because debit card transactions are not reported to credit bureaus.
Adhil Shetty, CEO of Bankbazaar.com, explains, “Credit scores are based on credit accounts such as credit cards, loans, and other forms of credit. To build or maintain a good credit score, it’s essential to use credit products responsibly, such as making timely payments on credit cards and loans.”
Myth 6: You Have Only One Credit Score
There are multiple credit bureaus, such as CIBIL, Experian, Equifax, and CRIF High Mark, each maintaining their own credit report and score. These scores can vary slightly because each bureau may have different information or use slightly different scoring models. It’s a good idea to check your credit score with multiple bureaus to get a comprehensive understanding of your credit health.
Myth 7: Credit Scores Are Only Important When Applying for Loans
While credit scores are crucial when applying for loans or credit cards, they are also increasingly being used by banks and lenders for other services. A good credit score can help you secure better terms not just on loans, but also on other financial products. Shetty says, “Maintaining a healthy credit score can have broader implications for your financial well-being.”
By comprehending these misconceptions, you can make more informed decisions to establish and uphold your credit scores, thereby improving your financial stability. Regular monitoring and responsible credit usage are key to achieving a good credit score.