So far, we have clearly understood the importance of credit score in our financial lifestyle. These three-digit scores play a major role not just in the loan and credit card segment, but are also significant to buy right insurance plan and lots more. However, the flip side of the story is that there are so many misconceptions attached to the credit scores. And, as they are vital instrument, it is essential to clear such myths related to credit score.
Bad scores last forever
It is believed that poor credit score remains on the credit reports for indefinite period, but the truth is just reverse. Undoubtedly, credit scores are a reflection of your financial behavior, and any missed or default payment or any red flags remain on the credit report only for a specific period of time. However, this requires constant efforts to improve the financial health over time. Doing so would make the past red flags fade away and you could get your scores back in good range.
Frequently checking credit report hurts the score
Most of the individuals avoid checking the scores frequently as they believe that doing so would hit their credit health poorly. Though, it is just a misconception as there are two types of inquiries – hard and soft. While soft inquiry is when you check the credit report, no matter how frequently, to determine the financial standing; hard inquiry is pulled when lenders check your credit report to determine creditworthiness for a new loan or credit card. Soft inquiry doesn’t have any impact on the scores, while number of frequent hard inquiries could hit the scores adversely.
You see the same version of credit report as shown to the lenders
Another myth related to credit score is that you receive the same version of your credit report as shown to the potential lenders like banks and financial institutions. While determining applicant’s creditworthiness, lenders always ask for the detailed version of credit report from the credit rating agencies. On the other hand, credit report shown to you is much more concise, providing only the details that might be of your use.
Monthly income impacts the credit scores
Although your income plays a major part in determining your credit scores, but that is in another context. Your net monthly income doesn’t have any direct impact on the scores and is only useful to evaluate your credit utilization ratio. Credit utilization ratio is calculated by dividing total monthly expenses by total monthly income to set an estimate whether you can afford a new loan or credit.
Debit cards impact your credit history
It’s absolutely wrong as using the debit card is same as using cash. Debit card is just a tool to access your deposits from savings or current account and doesn’t have any impact on the credit health. Therefore, cash withdrawal or any transaction done using a debit card would be considered a factor to build your financial standing.
Closing a credit card would improve the scores
Many believe that closing an unused credit card would build their credit health, but the fact is, it is just another myth related to credit score. Financial experts suggest that closing the credit card could be considered as negative move, because it would drag down your overall credit limit. Therefore, if you really want to build an excellent financial health, it’s advised to keep the cards active, even if they are of no use.
Settling the default payments would build the scores
It is just an illusion that making payment of all your default payments will remove any red flags from the credit report. It may be noted that any public record such as bankruptcy, default payments, or foreclosure could remain on the credit report for up to 7-10 years, even if you’re successful in settling the dispute or outstanding dues. Potential lenders could use the information to get a snapshot of your past financial behavior before approving you a new line of credit.
Credit repair agencies can fix your scores
There are several credit repair agencies out there and at times, you may consider hiring their services to fix your poor credit scores and get back to health credit standing. However, there is no short cut to repair your scores overnight and these agencies may not work that way as they claim to do so. Credit repair agencies could help you settle the disputes on credit report or report errors to the credit bureaus, but they can certainly not help you fix the scores overnight. Yes, they can definitely help you gain knowledge for making constant efforts to build your credit health.
Having a credit card can hit the credit scores
Many individuals avoid signing up for a new credit card as they believe it could adversely hit their scores. However, the fact is that the credit cards are great tool to build your credit scores in a short span of time. But, remember not to carry outstanding dues over the next statement cycle in order to avoid penalty charges.
Hope, this article has busted all your myths related to credit score.