Let’s confront it, credit scores can be a riddle due to the overwhelming misinformation out there. While it is essential to have good credit, it isn’t wise to trust everything you hear on what harms or improves your credit scores. Misguided by the myths, one wrong move, even with great intentions, could send your credit score crashing down.
Here is a list of 5 common credit score myths that you should be aware of:
Myth #1: Reviewing Your Personal Credit Report will Harm Your Credit Score.
Fact: When you personally check your credit report, a “soft pull,” or “soft inquiry” is caused, which implies that it will only be visible on a personal credit report. Moreover, this doesn’t at all impact your scores.
However, when you request for credit, a lender will draw and examine your credit report which will constitute a “hard inquiry” and will be included in your report. Hard inquiries are visible to other lenders as they may stand for fresh debt that isn’t yet appearing on a credit report as an account. Hard inquiries can impact credit scores.
Myth #2: There Is Only a Single Credit Score That Every Lender Refers to.
Fact: There are various types of credit scoring models used by lenders in the marketplace today. Different models employ different score ranges. Beacon and FICO are among the two most popularly used credit score models.
Each lender has their own preference for credit score models that they review to make a credit decision. A single report can include multiple credit scores, and individual scores can differ greatly with each other. When you are requesting a loan or credit account, confirm with the creditor or lender about the credit scores they review.
Myth #3: Making Cash Payments for Everything Can Boost Credit Score.
Fact: The key to setting up and building credit is using credit accounts, rather than cash or debit cards that do not support you in creating your credit references.
The best means to create a positive credit history is the responsible utilization of credits. For instance, you should stick to only those purchases against which you can make full monthly payments and ensure to conclude all loans as agreed. Furthermore, this will help you secure the best terms when applying for new services and utilities.
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Myth #4: The Ideal Means to Improve Credit Scores Is to Repay All Credit Accounts and Shut Them Down.
Fact: Perhaps, one of the quickest routes to improving credit scores is paying off all debts. However, closing accounts can decrease your credit scores because this reduces the measures of credit available to you. The concept of credit utilization is involved here, which refers to the quantity of credit used by you in comparison to the magnitude of credit available to you.
Lenders are more concerned about how responsibly you handle your credit accounts, so they prefer that you have available credit, but are exploiting relatively little of it. Also, the longer the duration of your association with the lenders, the more positive it impacts your credit score.
Myth #5: With a Poor Credit Score, One Can Never Be Eligible for a Loan.
Fact: This isn’t true because you can find plenty of lending companies out there ready to offer loans to people with bad credit.
A bad credit score is not the sole criteria that lenders consider when evaluating your creditworthiness. Income and debt level are other aspects that play a role. You can get approved for a loan even with a poor credit score, but will have to pay some additional fees or higher interest rates.
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Embrace reality and stay away from these damaging credit myths. To tread on the right path, keep track of your debts and examine your annual credit report, and take suitable measures if required. Using credit responsibly enhances your score and improves your financial future.