Debunking Common Credit Myths: What You Need to Know
Your credit score plays an important role in your financial health. It can impact your ability to secure a loan, get a credit card, or even secure a rental lease. Unfortunately, there are a lot of common myths surrounding credit scores that can lead to confusion and misinformation. In this post, we’ll walk you through some of the most common credit myths and the truth behind them.
Myth #1: You Have a Single Credit Score
In reality, you have multiple credit scores. There are three major credit bureaus that track your credit history: Equifax, TransUnion, and Experian. Each bureau may have slightly different information on file, which can result in different credit scores. In addition, there are multiple scoring models that lenders can use to determine your creditworthiness. While your credit reports may be similar across the bureaus, you may have multiple credit scores depending on which scoring model is being utilized.
Myth #2: Checking Your Credit Score Can Hurt Your Credit
Checking your own credit score is considered a “soft inquiry” and does not impact your credit score. On the other hand, a “hard inquiry” occurs when a financial institution pulls your credit report to evaluate your creditworthiness. Hard inquiries can impact your credit score, especially if you have multiple inquiries within a short period of time.
Myth #3: Credit Scores Are Based on Income
Your income is not a factor in determining your credit score. However, your income can impact your ability to obtain credit. For example, if you have a high income but a lot of debt, lenders may view you as a higher credit risk. On the other hand, if you have a lower income but good credit, lenders may view you as a lower credit risk.
Myth #4: Closing Credit Cards Can Improve Your Credit Score
Closing a credit card can actually harm your credit score. When you close a credit card, you reduce your available credit limit, which can increase your credit utilization ratio. Your credit utilization ratio is the amount of credit you’re using compared to your available credit limit. A higher ratio can indicate to lenders that you’re relying heavily on credit, which can impact your credit score. It’s generally recommended to keep your credit cards open, even if you’re not using them.
Myth #5: Paying Off Debt Will Immediately Improve Your Credit Score
While paying off your debt is a great way to increase your creditworthiness, it may take some time to see the impact on your credit score. This is because credit scoring models take into account a variety of factors, including your payment history, credit utilization ratio, and length of credit history. While paying off debt can improve your score, it’s not an instantaneous fix.
Conclusion:
Understanding credit myths and the truth behind them can help you make more informed financial decisions. While there are many factors that impact your creditworthiness, knowing the truth about credit scores can help you avoid making costly mistakes. Remember to regularly check your credit reports for inaccuracies, keep your credit utilization ratio low, and make timely payments to improve your credit score over time.