Finances are an especially difficult part of life for many people, and your credit score has a huge impact on your long-term financial health. However, credit scores have many myths and misconceptions surrounding them which can lead even the savviest of consumers astray.
Not knowing what you are doing or following bad advice can severely impact your score, and negative marks are something everyone should try to avoid. Here are 5 important things to know that may seem a little odd.
Myth Number 1: “I shouldn’t check my credit more than once every few years because it can lower my credit score.”
Fact: You can check your credit score as often as you want without any negative impact (assuming you do it through a credit bureau). Checking your own credit score counts as what is known as a ’soft’ inquiry. These ’soft’ inquiries do not have an impact on your credit score. You can even get one per year from each of the three credit bureaus for free – go to www.annualcreditreport.com to check it out!
Myth Number 2: “Carrying no debt will mean I have a high score.”
Fact: Actually, not having any debt will negatively impact your score. Statistically (and credit scores are all about statistics) people who do not have a credit card or any credit accounts are a higher risk for default on a loan – and thus have a lower score.
Myth Number 3: “Missing a payment won’t hurt my score as long as I pay it off soon.”
Fact: Even a single late payment will have a bad impact on your score. Paying your bills on time is the single biggest determinant of your credit score. So make sure they all get in, on time, every time! Your score will take into account how late the payments were, how many there were, and how long ago they occurred – up to seven years’ history is tracked.
Myth Number 4: “Debt of less that X% of my income has a positive effect on my score.”
Fact: As a matter of fact, the various credit scoring agencies do not have a record of your income, and so it is not used in determining your score. The most important thing is that you demonstrate an ability to manage your money, pay your debts on time, and not default on loans.
Myth Number 5: “Closing the accounts I don’t use will improve my score.”
Fact: Actually, your percentage of revolving credit utilization – the relationship between total available credit to you and the amount you are using – is a major component of your score. Closing accounts decreases the amount of credit available to you, thus causing your utilization to increase, lowering your credit score. Another detracting factor is that closing old accounts reduces your history, another major factor of your credit score.
Keep all of these things in mind when you are thinking about your credit score! Seemingly beneficial actions can impact you negatively, so do a little research before you proceed – the few minutes will be well worth it.
Great post on credit myths. The biggest myth I come across is #1. Everyone needs to check their credit at least once a year.
It should be noted that http://www.annualcreditreport.com is good for checking your report for inaccuracies and identity theft, however, it will do very little to tell you your creditworthiness.
There is a reason why they are free. Check out this post for some more information on free credit reports. http://www.720creditguru.com/2.....they-cost/