Credit scores are used for a multitude of reasons that extend well beyond lenders using it to approve loans. Other industries have grasped on to the logic of reviewing a credit score before providing services. For instance, car insurance providers will use consumer credit scores to set premium rates and utility companies will run credit checks to determine the amount of upfront deposits required from customers before services can be activated.
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Credit Myths – Don’t Be Fooled
Despite the increased attention placed on credit scores, there are still some rumors and plain untruths that are confusing consumers in regard to their credit scores and history.
Here is a look at 5 of the most popular untruths about your credit score:
1. If you check your own credit, you lower your credit score.
This myth is just incorrect. Checking your own credit score does nothing to affect your credit history or drop your score.
If you have not been regularly checking into credit because you thought you would be hurting your own creditworthiness, you are making a mistake. Checking credit reports and credit scores at least annually is a savvy move for improving your personal finances. Unless you know what is on your credit report and where you stand with creditors, you cannot make informed financial decisions. Every consumer has the right to request credit reports from the three reporting agencies (Experian, Equifax, and TransUnion) for free on an annual basis, or at any time after being denied credit for a period of up to 60 days. If you neglect checking in with your credit report and history, you may miss fraudulent transactions or identity theft incidents.
2. Closing credit card accounts will kill your credit score.
There is some truth to this statement but it really depends on your specific financial situation. Closing credit card accounts does change your credit ratios as far as your credit score is concerned. However, keeping open credit card accounts that charge you high annual fees or prove to be too much of a temptation to spend more than you earn can destroy the balance of your overall financial situation. Building a good credit history is just as much about doing things to bring your score up as it is avoiding things that pull your score down.
It is okay and sometimes necessary to close accounts you truly do not need. Your credit score may drop a few points as a result, but over time your good financial planning can increase the score again. Don’t close accounts if you are close to applying for any type of financing or the short-term dip in your credit score could hurt you.
3. There is nothing consumers can do to improve credit scores.
There may be some ‘credit repair’ agencies that have perpetuated this myth just to get more business, but the truth is that everyone has the power to improve their low credit scores. The caveat is that credit repair and credit score improvement cannot be done overnight. It takes time and diligence to bring credit scores up. Typically, your consistency in paying your creditors on time, not running up new debts, and managing your overall budget on a consistent basis will help improve your credit score. You also need time to heal your past credit mistakes. As your past late payments and other credit mishaps fade into history, your score should improve.
4. There is no point in fixing credit since I don’t need a loan.
This is a big mistake too many consumers are making. They figure since they don’t need a loan or a new car any time soon, their credit score means nothing to them. The truth is that so many more companies are relying on credit scores to make financial decisions that affect your everyday life and the amount of money you have to spend each month. As mentioned, you may have to pay more money for your car insurance than someone with better credit scores. Additionally, the job market is getting tougher as more companies are relying on credit background checks to make hiring decisions. You may not need a loan in the future, but you may need a job. Fixing your credit score should be a financial priority.
5. You need to be in debt to have better credit scores.
This statement is not exactly true. You do need to have established credit in order to have a credit score. If you don’t have a bank account, loans, mortgage, or credit cards account, your credit history may be lacking and this can work to your disadvantage. A good credit score requires a good mix of credit usage by consumers. Those who have a mortgage, car loan, and a credit card account shows they can handle multiple types of financial responsibilities. You do not need to be in debt to have good credit. In fact, being in debt hurts your credit so make sure you pay off credit card balances in full each month and make your mortgage loan payment on time each and every month.
Have you ever believed any of these credit myths? What other myths have we missed?