Credit scores are an important part of personal finance, but there are many myths surrounding them that can cause confusion and impact your finances. In this article, we will debunk 10 common myths about credit scores and explain how they can impact your financial life.
Myth #1: Checking your credit score will lower it
Many people believe that checking their credit score will hurt their score. However, this is not true. When you check your own credit score, it is considered a “soft inquiry” and does not affect your credit score. Only “hard inquiries” made by lenders when you apply for credit can impact your score.
In fact, it’s a good idea to regularly check your credit score to monitor your credit health and ensure that there are no errors or fraudulent activity on your report.
Myth #2: Closing credit accounts will improve your score
Closing credit accounts can actually hurt your credit score, especially if the accounts have a long history and a high credit limit. This is because closing accounts can lower your available credit and increase your credit utilization ratio, which is a key factor in determining your credit score.
It’s important to keep your credit accounts open and active, even if you don’t use them regularly. This can help to maintain a healthy credit utilization ratio and demonstrate responsible credit management to lenders.
Myth #3: Paying off a collection account will remove it from your credit report
Paying off a collection account does not necessarily remove it from your credit report. The account will remain on your report for seven years from the date of the first delinquency, even if you pay it off.
However, paying off a collection account can improve your credit score, as it shows that you are taking responsibility for your debts and can help to reduce the negative impact of the account on your credit report.
Myth #4: Your income is a factor in determining your credit score
Your income is not a factor in determining your credit score. Credit scores are based on your credit history, including your payment history, credit utilization ratio, length of credit history, types of credit accounts, and recent credit inquiries.
While lenders may consider your income when making lending decisions, it is not a direct factor in determining your credit score.
Myth #5: Your credit score only matters when applying for credit
Your credit score can impact many aspects of your financial life, beyond just applying for credit. For example, landlords, insurance companies, and even employers may check your credit score when making decisions about renting a property, providing insurance coverage, or offering employment.
Having a good credit score can also help you to qualify for lower interest rates on credit cards, loans, and mortgages, which can save you money over time.
Myth #6: Closing a credit card will erase its history
Closing a credit card account does not erase its history from your credit report. The account will remain on your report for seven to ten years, depending on the type of account.
If the account has a positive payment history and a low credit utilization ratio, keeping it open can actually help to improve your credit score over time.
Myth #7: Your credit score will improve if you carry a small balance
Carrying a small balance on your credit card does not necessarily improve your credit score. In fact, it can actually hurt your score if you carry a high balance and have a high credit utilization ratio.
It’s best to pay off your credit card balance in full each month, or keep your credit utilization ratio below 30% of your available credit, in order to maintain a healthy credit score.
Myth #8: Only negative information is included on your credit report
Your credit report includes both positive and negative information about your credit history. Positive information, such as on-time payments and a long credit history, can help to improve your credit score, while negative information, such as missed payments and collections, can hurt your score.
It’s important to regularly review your credit report to ensure that all of the information is accurate and up-to-date, and to take steps to address any negative information that may be impacting your credit score.
Myth #9: Closing old credit accounts will improve your score
Closing old credit accounts can actually hurt your credit score, as it shortens your credit history and reduces your available credit. Credit history and available credit are both important factors in determining your credit score, so it’s best to keep your old credit accounts open, even if you don’t use them regularly.
If you have a credit card with an annual fee that you don’t want to pay, consider asking the issuer to switch you to a no-fee version of the card instead of closing the account.
Myth #10: You only have one credit score
There are actually multiple credit scoring models, and each model may produce a different credit score based on the same credit report data. The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850.
Other credit scoring models include the VantageScore, which ranges from 300 to 850, and the PLUS Score, which ranges from 330 to 830.
It’s important to keep in mind that each lender may use a different credit scoring model when making lending decisions, so your credit score may vary depending on the lender and the scoring model they use.
Q: How does my credit score impact my insurance premiums?
A: Your credit score can impact your insurance premiums, as insurance companies may use your credit score as a factor when determining your risk level and setting your premiums.
Studies have shown that people with lower credit scores are more likely to file insurance claims and have higher claim payouts, so insurance companies may view them as higher risk and charge higher premiums.
If you have a low credit score and are concerned about the impact on your insurance premiums, you may want to consider working to improve your credit score over time.
Q: Can my credit score impact my ability to get approved for insurance coverage?
A: Yes, your credit score can impact your ability to get approved for insurance coverage. Insurance companies may use your credit score as a factor when determining whether to approve your application for coverage.
If you have a low credit score, you may be seen as higher risk and may have trouble getting approved for insurance coverage, or you may be offered coverage at a higher premium.
Q: Can improving my credit score help me save money on insurance?
A: Yes, improving your credit score can help you save money on insurance premiums. Studies have shown that people with higher credit scores are less likely to file insurance claims and have lower claim payouts, so insurance companies may view them as lower risk and offer lower premiums.
If you have a low credit score and are looking to save money on insurance premiums, working to improve your credit score over time may be a good strategy.
In conclusion, credit scores play a crucial role in your financial life, and it’s important to understand the myths and facts surrounding them. By debunking these 10 common myths about credit scores, you can gain a better understanding of how they impact your finances and take steps to improve your credit health. And remember, a good credit score can not only help you qualify for credit, but can also impact your ability to get approved for insurance coverage and save you money over time.