A good credit score is a crucial component of an effective personal finance strategy. With a good credit rating by your side, you can easily get credit from banks and other lenders. Besides, you can even get loans at cheaper interest rates.
Despite its importance, many people find these terms overly complicated. Moreover, there are several myths surrounding the credit score that may mislead current and potential borrowers. We have tried to list some of these myths along with their facts.
The credit score gets reduced every time someone accesses it
Fact – To understand this is in detail, you may have to understand the differences between a ‘hard inquiry’ and a ‘soft inquiry’. When you apply for a credit card or a loan, the lender would pull your report to study your credit rating. This is a hard inquiry and reduces your score by a few points. This is the reason why experts advise against too many credit applications within a short span of time. On the other hand, certain companies could access your credit report to give you pre-approved offers. Accessing only a portion of your credit report is a soft inquiry and does not impact your credit score. Similarly, it won’t hurt to access your own credit score.
You can improve your credit score by closing your credit card
Fact – You have more chances of improving your credit score by using your credit card than closing it. The underlying principle of a credit report is to assess the risk of extending credit to a borrower. The key is to use your plastic money but never to max it out. This will give the impression that you are not credit-hungry and have the means to repay your loans.
There is only one credit score
Fact – When you pull your credit report, you will see a rating or a score. However, this is not the only or the final figure that financial institutions use. There are several models that consider different aspects of your credit report and may arrive at different scores. It completely depends on their reason to pull your report and the factors they want to weigh-in.
Credit Bureaus give you scores
Fact – Credit bureaus are agencies that collect your information and publish it in your credit report. Their main objective is to give an idea of risk associated with a customer. It depends upon the lenders how they want to use the report. For instance, banks may not extend loans to a customer if he has a good credit score but is not earning currently. Similarly, they may easily extend loans to a customer who has a bad score but earns a decent amount and has a steady job.
You can have a good credit score with a high paying job
Fact – Having a good credit score is more about money management than it is about earning a high income. A high paying job can certainly give you more financial freedom to pay your EMIs regularly and on time. This will correlate with lower risk and thus easier acceptance of your applications. However, if you have no history of how you manage your debts, you may not get even a small loan despite your high income.
Married couples have a joint credit report
Fact – Whether you are married or single, your credit report is your own. It is linked to your Social Security Number and doesn’t take into account your marital status. Moreover, any kind of personal details like your ethnicity, place of origin or sexual orientation makes no difference to your credit score.
Paying off your debt would erase them from your credit report
Fact – All the information on your paid-off debts will stay on your credit report for years to come. If you pay your dues on time and in full, this information will reflect in your credit report and show a lower level of risk. Similarly, if you are late with your payments, this information will also stay there for as long as seven to ten years.
There are short-cuts to building a good credit score
Fact – If someone is promising you this, know that you are in for a scam. The only credible way to building a good credit score is through better debt management.