Credit Score Myths: 5 common misconceptions you need to stop believing

A credit score has a dramatic impact on your ability to borrow, secure the best loan terms possible, and even get a job or rent an apartment. More often than not, however, many myths surround credit ratings and make matters worse and confuse people who have made wrong financial decisions. 

Let us debunk some of the popular myths regarding credit score and explain the facts behind this valuable financial metric.

Understanding credit score

A credit score is a three-digit number that portrays your creditworthiness, or how likely you are to return borrowed funds. Lenders use credit score to assess their risk before issuing credit. Some factors considered in the credit score include:

• Payment history (whether you pay your payments on time)
• Credit utilisation ratio (the amount of credit used up over the limit)
• Length of credit history
• Types of credit used (for example, loans and credit cards)
• New credit inquiries.

With a higher credit score, it can make it easier to obtain better-terms personal loans and credit cards; if the score is low, there could be fewer options for borrowing at potentially higher interest rates.

Myths about credit score

1. Checking your credit score hurts it: This has been considered one of the commonest myths. Checking your credit score is called a "soft inquiry" and does not affect your credit score. Regular checking of the score keeps you informed and enables you to take remedial action as required.

2. Income impacts the credit score: Credit score are solely determined by information in your credit report, which does not consider your income. Although income determines one's ability to service debt, an individual's good salary does not mean he has a good credit score. On the other hand, someone with a small salary maintains a good credit score if he manages his debt appropriately.

3. Loan approvals are based only on credit score: Your credit score is just one of the factors. These lenders consider your employment position, income stability, payback history, and the type of loan or credit product you are searching for. A strong credit score alone does not guarantee approval.

4. Closing old accounts improves your credit score: Closing an old credit account may seem like it is cleaning up your finances, but it could actually be damaging to your credit score. Older accounts make up the length of your credit history, and that's exactly what lenders use to measure your behaviour in regards to your money. Instead of closing those unnecessary accounts, work on managing them responsibly.

5. Debit cards improve your credit score: Debit cards help with managing daily costs but do not help you improve your credit score. Unlike credit cards, debit cards are not borrowing money from a lender; they draw directly from cash in your account. Improve your credit score by using credit responsibly and paying your obligations on time.

Conclusion

Understanding the truths about credit ratings is paramount in terms of financial security. Knowing how to disappoint those common fallacies and good, good credit habits will create a bright, healthy credit profile with better access to financial possibilities. Remember, your credit score is a reflection of your financial obligations.

Maintaining good credit status sometimes requires noting it, paying payments on schedule, and using credit responsibly. However, prudence in managing finances takes control for long-term financial success.