A credit score is a number that represents the credit worthiness of a person. It is based upon your credit history, and helps banks, insurance companies, and other businesses determine your risk when loaning you money or approving you for a service. Your credit score will also determine what kind of interest rate you qualify for. Like all things, there are many myths regarding credit scores, here are a few that need to be busted:
- Paying off my debts will make my credit report instantly spotless – A credit report is a history of your finances, not just a look at where you are now. If you’ve had issues in the past, paying everything off at one will not erase any payment issues from your past. Making regular timely payments can shows responsible use of credit and reestablish your credit.
- Canceling credit cards boosts my score – Creditors want to see that you can manage your debt responsibly. One factor in your score is credit utilization, how much of your credit limit you actually use. It’s better if this doesn’t go above 50%. Closing an account can actually cause your utilization to go up, because it lowers your total available credit.
- I don’t need to check my credit report if I pay my bills on time – Experts estimate that 80% of all credit reports contain an error. Since this information is used to determine your creditworthiness, it is crucial that you check your report for any errors, even if you make all your payments on time.
- Checking my own credit report harms my standing – The three reporting agencies distinguish between ‘hard inquiries’, when a business checks your credit, and ‘soft inquiries’, when you check it. While too many hard inquiries can harm your score, that does not hold true for personal inquiries.
- The three credit reports and credit scores from the three credit bureaus will be the same – Credit reports typically come from three major credit bureaus, TransUnion, Experian, and Equifax. Since they are three separate companies, and the rate at which they update their records is very different, you will not have reports and credit scores that are exactly the same.
- Paying cash for everything can help a credit rating – Responsible credit use isn’t a bad thing. Building a history of consistent payments is important. It actually helps you build credit and shows lenders that you can manage your finances. Credit abuse is what you should avoid. Cash payments are not recorded like a credit payment and don’t help build that history.
- I can always pay someone to fix or repair my credit – Companies claiming to fix your credit cannot erase financial facts. As long as a creditor has proof of your bad payment history, the information remains on your report.
- Good credit is tied to how much money a consumer has in the bank – The fact is that your account balance does not affect your credit scores. Things such as bouncing checks or overdrawing an account can negatively impact your account if sent to collections.
- Too many credit cards are bad for your scores – To the contrary, having multiple lines of credit can be good for your scores. It shows that you can responsibly handle them and that others that have reviewed your financial information have trusted you with their card. Over-utilizing credit can become an issue and negatively impact your scores.
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Since the new mortgage reform rules went into place this year, it’s even more important to know the differences between credit facts and myths. Understanding your credit score can help you make sound financial decisions, and help you better prepare for your next purchase. If you’re ready for a new home start your search today.