3 Common Credit Score Myths Debunked

Alright, let’s break down credit scores first. Think of them as a financial report card. Lenders look at your score to gauge how reliable you’d be in paying back a loan or credit. A high score signals that you’re responsible with credit, while a low score might suggest that you’re a bit riskier. Simple as that.

Now, where does this score come from? It’s all about the data in your credit report, which includes your payment history, the amount of debt you have, how long you’ve had credit, the types of credit you use, and how much new credit you have. Multiple factors go into this elaborate calculation which ranges from 300 to 850.

There are some myths floating around that can throw you off your game when trying to maintain or boost your score. Misinformation can lead to poor financial decisions and unnecessary stress. Stick around, and we’ll clear up the confusion together.

Myth 1: Checking Your Own Credit Score Hurts It

It’s easy to get worried about checking your own credit score, thinking it might drag your score down. But don’t stress! This myth couldn’t be further from the truth.

Here’s the real deal: There are two types of credit checks – hard inquiries and soft inquiries. Hard inquiries happen when a lender checks your credit for a loan or credit card application. These can slightly lower your credit score. On the flip side, soft inquiries occur when you check your own score or when companies look at your score for pre-approval offers. Soft inquiries don’t affect your credit score at all.

Regularly checking your credit score is actually a smart move. It helps you stay informed about your financial health and spot any discrepancies or errors early. Consider using free tools from reliable services that let you monitor your score without taking a hit.

So, go ahead and give your credit score a look-see. Staying informed is one of the best ways to take control of your financial future.

Myth 2: Closing Old Accounts Improves Your Credit Score

Thinking about tidying up your financial records by closing old credit accounts? Hold up! This common myth can seriously mess with your credit score.

When you close an old credit account, you’re cutting down the average length of your credit history. Even though it’s tempting to get rid of unused accounts, having a longer credit history generally works in your favor. Lenders like to see a well-established credit history, and closing old accounts might make it seem like you’ve had credit for a shorter period.

Another point to consider is your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. Closing an account reduces your total credit limit, which can make your usage ratio skyrocket, and that can hurt your score. Keeping those old accounts open gives you more available credit and helps balance out your use.

Instead of closing old accounts, think about keeping them open and in good standing. If you’re concerned about unused cards getting lost or misused, store them somewhere safe or consider setting small, manageable auto-payments on them to keep them active.

Managing your credit wisely isn’t just about cutting ties with old accounts. It’s about understanding how credit decisions impact your score and making choices that keep your financial health in check.

Myth 3: Paying Off Debt Automatically Removes It from Your Credit Report

Paying off debt is a huge win and deserves some serious kudos, but here’s where things get tricky. Just because you’ve paid off your debt doesn’t mean it’s going to vanish from your credit report immediately. The history of that debt, whether it was paid off on time or late, sticks around for a while.

When you pay off a debt, it gets marked as ‘paid’ on your credit report, which looks a lot better than ‘unpaid’ or ‘in default’. However, the record of the debt itself can stay on your report for up to seven years depending on the type of debt and your payment history. It’s kind of like a scar that fades but doesn’t completely disappear right away.

If you’ve got old debts that you’ve paid off, it’s a good idea to check your credit report to ensure they’re marked correctly. Disputing any inaccuracies is key. Keeping tabs on your credit report helps ensure that your efforts to pay off debt are accurately reflected.

Handling debts wisely means staying on top of your credit report even after the debt is paid off. It’s about making sure that your financial success story is correctly documented and that old debts aren’t haunting you longer than they should be.

Practical Tips for Maintaining a Healthy Credit Score and Final Thoughts

To keep your credit score in prime shape, there are some straightforward habits and strategies you can adopt right away.

Regularly check your credit report for mistakes and inaccuracies. Errors can happen, and catching them early can save you tons of hassle down the road. Use free annual credit report services or trusted financial platforms like one of the 3 credit bureaus Transunion, Equifax and Experian.

Mix up your credit types responsibly. Having different kinds of credit (think credit cards, car loans, etc.) shows lenders you can manage a variety of credit lines.

Keep your credit utilization low. Aim to use less than 30% of your total available credit. Managing your spending and staying within this limit shows you’re not over-reliant on credit.

Pay your bills on time, every single time. Late payments can seriously ding your credit score. Setting up automatic payments or reminders can help keep you on track.

Staying informed and proactive with your credit habits is key to maintaining a healthy score. If you need help implementing some of the recommendations listed please take a moment and set up a free consultation with Transforming Finances to find out how we can help you!

Were any of these myths surprising to you? Have you used some these recommendations which ones worked for you? Sound off in the comments!

Until next time Grace and peace to you!

Disclaimer:
The information provided in this post is based on my experience and research in personal finance. While I strive to share accurate and helpful insights, this content is for informational purposes only and should not be considered professional financial advice. Please consult a qualified financial advisor for advice tailored to your specific situation.