Beginning in the 1980s, banks began implementing an algorithm-based system to help lenders and banks assess the creditworthiness of consumers. Over time, it has become increasingly important for consumers to fully understand their credit score – your valuation as a borrower.
Sadly, this is not the case with so many misconceptions out there regarding your credit score, what hurts it and what helps improve it. For some, this confusion has come from having issues grasping the traditional three-digit number used in grading the score. For many, the misconceptions run deeper. The result is that many rank very low on the credit ratings as they struggle with rising debts and high interest rates.
To understand your credit scores, you must first do away with the misconceptions that cloud your judgment. Then and only then can you begin to grasp how to improve your credit ratings. What follows are some of the top misconceptions and why they are all false.
1. Checking Your Credit Is Bad For Your Score
Credit checks have two different effects depending on who is checking and why. There are the “soft inquiries” and the “hard inquiries”. Soft inquiries have no effect on your credit scores. Soft inquiries are usually a part of a background check carried out by potential employers, landlords, and even insurance companies. Hard inquiries, on the other hand, lowers your score by a few points. A hard inquiry is initiated by a financial institution assessing your credit worthiness to decide if you qualify for a loan. Whether or not you are approved for a loan, your credit score is lowered.
When you check your credit score yourself, it is considered a soft inquiry. This means that you have nothing to lose by checking your credit score and trying to keep track of it.
2. Credit Scores Take Forever To Move Up
Credit scores are like performance checks of your credit behavior over a given time period. As a result, it can increase or decrease, adjusting to changes in your credit behavior. Credit ratings are updated every 30 days, and can increase by as much as 20 points in a 90-day window if you make payments on time and do not use any new credits.
3. My Credit Score Could Hurt My Employability
To put it simply, this is wrong. It is true that potential employers are likely to check your credit report – following your approval – as part of your background check. But that’s about it. Your credit report is very much different from your credit score. The credit report details your credit history, and can be used to discover fraudulent activities. Regularly check your report during the year to ensure your credit report is free of errors. You can check your credit report for free at AnnualCreditReport.com.
4. My Credit Score Must Be Good Since I’ve Never Borrowed
It is easy to assume that if you have never been in debt, then your credit score must be good, really good. After all, it shows just how responsible you are. Suffice to say that this is not exactly true. Your credit score reflects your credit history. It proves credit responsibility – that you are able to handle credit responsibly. If you have no credit in your name, lenders will find no credit management history to look to for proof of responsibility.
Applying for a credit card or a loan and paying up on time is one way to build your credit score against any possible eventualities, helping you prove that your credits are paid up when due. A credit builder credit card can come in handy in this case, if you are refused a mainstream credit card.
5. Closing Old, Negative Accounts Will Build My Score
This myth makes it seem as though closing old inactive accounts and paying off negative records will build your score. For one, closing old accounts might inadvertently lower your credit score rather than improve it. This is because it decreases the amount of credit available to you as against the balances you owe. Indeed, leaving old accounts open improves your rating over time.
Likewise, paying off negative records does not get them off your credit report. Generally, when you pay off negative records such as collection accounts and ate payments, they remain on your credit report for between seven and ten years. It will be listed as “paid” but might not have an immediate positive impact on your score, and it might yet continue to have some effect, until it is purged from your report. Even then, do well to pay off your debts and clean off negative records as quickly as possible to have the positive effects roll in sooner.
6. There Is Only One True Credit Score
FICO is undoubtedly the most popular credit score. But it is not alone. There are several different credit scores, and several different models designed by credit bureaus, which might be unique to different industries. Because different industries, and indeed different lenders assess risk differently, there is no consistency in the different scores and scores can differ by as low as 5, or as much as 50 points. Although FICO is used by many lenders, it is not universal; so you can’t be sure by which score you will be assessed. Regardless, pulling your score from one the companies will give you a general idea of credit health and your “risk range”.
Even if you think you are in good credit health, there is no harm in checking regularly to be sure. By checking your credit score and report often, you can detect any inaccuracies on time, moving to correct them before they become serious issues. Pay your bills on time, try to quickly lower your debts, and ensure your records are accurate. A track record of good financial behavior is sure to keep your score on the high.