Myth #1: Checking your credit score will lower it
Many people believe that simply checking their credit score can negatively impact it. This is a common myth that actually holds no truth. When you check your own credit score, it’s considered a ‘soft inquiry’- which doesn’t have any effect on your score. The only time your score could be impacted by checking it is if a lender or creditor performs a ‘hard inquiry’- which happens when you apply for a loan, credit card, or other financial product. Multiple hard inquiries in a short period of time could signal risk to lenders, thus negatively affecting your score.
Myth #2: Closing credit cards raises your credit score
This is a misconception that many people believe- if you have too many credit cards, closing some of them will have a positive impact on your credit score. However, closing credit cards can actually have the opposite effect. One of the main factors creditors look at in determining your credit score is your credit utilization ratio- which is the amount of credit you’re using compared to the amount of credit available to you. If you close a credit card, it lowers the amount of credit available to you, which can ultimately damage your credit utilization ratio. Additionally, closing a credit card can have an impact on the length of your credit history- which, when shortened, can also negatively affect your overall credit score.
Myth #3: You have a single credit score
There are actually many different types of credit scores- and the one that’s being used for a specific application can depend on the lender or creditor in question. Often, people will use their FICO score as a benchmark for their creditworthiness, as it’s the most commonly used score by lenders. However, there are also other scores like VantageScore or industry-specific scores that can be used as well. It’s important to understand which score is being used in the context of your application, and to know your score(s) across all credit bureaus.
Myth #4: Paying off debt immediately boosts your credit score
It’s a common misconception that paying off debt immediately increases your credit score. However, this might not always be the case. Paying off any outstanding debt on your credit cards and loans is definitely a positive move, it might not have any difference on your score. The credit bureaus could take up to 60 days to update the information on your credit report. So, if you are applying for credit before the credit bureaus have updated their records, your outstanding debts will still reflect on your credit report. Moreover, closing accounts immediately might negatively impact your credit utilization ratio and length of credit history.
Myth #5: All debts are equal in the eyes of credit scoring
All debts on your credit reports are not equal in the eyes of credit scoring. Installment debts such as mortgages and car loans can be favorable to your credit score, whereas too many revolving debts like credit cards can signal risk. The FICO score actually puts more emphasis on your credit utilization ratio than the total debt owed. So, if you are able to maintain a low credit card balance relative to your available credit, you are likely to score higher than those with higher balances relative to the credit limit. Our goal is to consistently deliver an all-encompassing learning journey. That’s why we recommend this external resource with additional information about the subject. Find more on this topic here, dive deeper into the topic!
Conclusion
Don’t let common credit score myths ruin your financial decisions. Knowing the facts about how credit scores work enables you to make informed decisions about your finances. Understanding the factors that affect your credit score is critical to establishing and maintaining a good credit score. The more information you have about how credit scores work, the more likely you are to make smart financial decisions and achieve your financial goals.
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