Unmasking credit score and credit report myths
Your credit worthiness is important! Not only is your credit score important when it comes to credit, it also plays an important role in your financial life. Landlords, lenders and employers look at your credit score to determine credit worthiness and to check your financial history. So, it’s important that you know where you stand, and the first place to get a clear picture of your situation is in your credit report.
As important as knowing your credit score, is understanding what goes into the making of that credit score. There have been many misconceptions about credit scores which can impact the decisions you make when it comes to credit. Your financial health matters to us, so we’ve debunked some of the myths surrounding your credit score – take a look!
Myth 1 – Income/Savings impacts credit scores
Are you guilty of assuming that your bank balance will give you a higher credit score? This isn’t true. There are many factors that are used to calculate your credit score. They include payment history, total debt owed, how long you have had debt, and your credit mix. Your income isn’t included in your credit report. While your income matters for credit applications, it does not directly affect your credit score.
Myth 2 – Applying for a loan doesn’t negatively impact your credit score
Do you think that applying for new credit or a loan can’t possibly hurt your credit score? Think again – it does! Applying for a personal loan, car finance, home loan or even a cellphone contract would mean that the lender ‘pulls your credit’. This is a hard inquiry, which does impact your credit score. Therefore, if you have had several hard inquiries in a short period of time, it can have a negative impact on your credit score and might show lenders that you are often desperate for credit.
Myth 3 – Paying off all my debts helps my credit scores
Debt is frustrating, we understand! Everyone wants to be debt free, but paying off all your credit cards and loans can hurt, rather than improve, your score. Your credit utilisation is considered when calculating credit scores. This refers to the amount of credit available and the amount you’ve used. So, the more credit you have at your disposal, the better for your credit score. Paying off all your debts also affects how long you’ve had credit for – and this is another factor used to calculate your credit score. If you’ve had your loans or credit cards for a short period of time, it reduces the age of credit on your accounts, which reduces your credit score.
Myth 4 – My credit score merges with my partner’s one when we get married
You and your partner are individuals and, therefore, your credit histories will remain separate after you get married. If you sign up for a home loan together (joint debt), this will affect both of your credit scores. But if you have a loan by yourself, before you got married, that loan will reflect only on your credit report, even after getting married.
Myth 5 – Having no debt will give me a good credit score
That is not true! If you want to build a positive credit history, you would need to have open credit accounts where you can show a history of on-time payments. Without a good mix of credit accounts like retail accounts, credit card, vehicle or home loan etc. you can’t possibly have a good credit score – it’s even worse when you have no credit at all. Basically, no credit means no credit score!
Myth 6 – It takes long to fix a bad credit score
How quickly you recover depends largely on your credit management and spending choices. If you continue to skip repayments, or pay late – then that will stay on your credit report until you start making payments on time and using credit responsibly.
Myth 7 – More debts means good credit score
The truth is, it is how you manage credit that helps to build a good credit score. There’s no need to create more debts just to build a good credit score. The most important factor for a good score is to be on time with payments. A good credit usage ratio also helps. That is the percentage of what you have used compared to the total credit available. A ratio below 30% is considered good.
Credit myths and misconceptions can make or break your credit management. Don’t let them influence your credit decisions – be in the know and protect your credit score.