Credit score myths uncovered
Credit plays a very important and crucial role in our lives. It allows you to buy and get things that you could not afford in any other way. Probably the best demonstration of how important credit to you is when you are buying a house. Chances are that you are like most consumers and you cannot pay for a house in cash. The only way that you can afford is by getting a loan. The good news is that there are lenders willing to give your credit so you can make the home purchase. That’s just one of the important roles played by credit today. The problem is that there are so many myths that people believe to be true in connection to credit. You have to know about these myths so you can get the most out of your credit.
Before we can go any further, you have to get a deeper understanding of what credit is. Credit is simply just the trust placed by banks and other companies in an individual or a company. They give loans to the consumer with the understanding that it would be paid back. The trust is important because even if there are methods for recovering the amount that was given in the loan, the lender is still at risk of losing the money if the consumer is unable to pay back the amount.
Credit Scores and Credit Histories
Banks and other lenders would like to minimize the risk that they are facing as much as possible. That is why they use various methods in determining whether a consumer is creditworthy or not. The two of the most effective tools that they use are the credit history and the credit score.
The credit history is the record of how well a borrower handled his credit. All of his transactions are reported to credit reporting bureaus that keep information on consumers. When a creditor asks for some information regarding a particular borrower the credit bureau gives out a credit report which is a summary of a consumer’s credit history. That report is also used by lenders for coming up with the credit scores of a consumer. You can think of the credit score as a kind of grade. Instead of measuring your academic performance, your credit score is a measure of how well you handled your finances, particularly your credit.
Credit Score Myths Uncovered
Like with most things connected with finance, there are many myths that people believe in connection with credit score. Most of these myths have something to do with that could hurt and what could be beneficial to one’s credit score. So you can take the right path, here are some of the most common myths that people believe in connection with credit scores:
Myth#1- It Hurts Your Credit Score When You Check Your Credit Report
This is probably the most common myth that people believe in connection with credit scores. Because of this people are reluctant to actually check their own credit report. But nothing could be further from the truth. Checking your own credit report does not affect your credit score and is in fact a recommended step for everyone as a necessary step in ensuring your personal finance. You should check your credit report at least once every year.
While credit inquiries from you will not affect your credit score, inquiries from creditors will have a definite impact. If there are too many inquiries then it will definitely pull down your credit score. So you should have a plan when you try to apply for new credit.
Myth#2- Lenders Use the Same Credit Scoring System
Another common myth concerning credit score is that lenders all use the same credit scoring system. The truth is that lenders use different credit scoring models and you should be aware of that. The good news is that the three biggest credit reporting agencies have banded together to come up with a uniform credit scoring model. This model is called VantageScore. This model uses a letter grade which makes it easier for people to recognize the significance of the score. C would mean good and an A would be the highest score.
Myth#3- Paying in Cash Helps Your Score
Some people think that if they did not use their credit cards to buy something and they just paid in cash that it would be better for one’s score. But that isn’t true and it shows a total lack of understanding on how credit score works. Your credit history is a record of how well you handled your credit and paying in cash is not part of that. If you want to improve your credit score then you should use your credit cards but pay it on time all the time.
Myth#4- Paying Off and Closing Accounts Would Be Best
Others honestly believe that the fastest way to improve their credit score is to pay off whatever it is that they owe with the account and close it. Paying off an account will have a positive effect on your credit score, but closing it will not have a good effect. In fact, closing the account would have a negative effect. One of the factors used in computing for the credit score is the length of credit history. This means that old accounts can have positive effects on your credit score. Closing old accounts would deprive you of the positive effect that they might have.
Myth#5 – More Assets Mean Better Credit Score
Another myth that many people subscribe is the belief that the credit score is directly proportional to the amount of assets that one has. It is understandable why many people would believe this myth to be true. Wealth is connected with good financial standing so people simply believe that the more that they have, the better their score would be. But assets and wealth would have little direct impact on your credit score.
There is no information on the credit report about your wealth, assets and savings account. It can only have an indirect impact because the more money that you have, the sooner that you can pay your obligations.
Myth#6- Academic Background Has an Effect on Your Credit Score
Another common myth concerning credit score is that your educational attainment and educational background has an effect on you credit. This one is easy to understand why it gained popularity. People usually associate people who are highly educated with financial success. They believe that those with high educational attainment have automatically better credit scores when compared to those who are not as well educated.
The belief that educational attainment has a connection with the credit score of an individual is a false one. It ignores the nature of the credit score. This score is based on the credit report which in turn is based on how well a consumer handled his credit. Even a doctor or a lawyer who does not pay his bills on time can end up having a bad credit score.
Myth#7- Poor Credit Has No Effect on Job Hunting
There are those who dismiss their bad credit score. They say that they cannot do anything about it and so they try not to worry. They believe that the low credit score and their poor credit report would have no effect beyond not being able to get new credit. In reality, a poor credit report might prevent one from getting hired. For some employers having a good credit history is an important part of the requirement for hiring a new employee. This would depend on the industry, but it would help to know that if you are applying for new work. You should realize that your credit score goes a long way.
Myth#8- Credit Card Companies Set the Score
Some people believe that it is the credit card companies that decide on the score that they would give to a consumer. In some ways they are involved in the process. The information used in computing for your credit score, comes from your creditors as well, but they are not the ones that assign a numerical figure to you. It is the credit reporting bureaus that would come up with the score using models that have been standardized. There are many scoring models in use today and you should be aware about which model was used for the score that you are viewing.
Improving Your Credit Score
So what is it that you have to do in order to improve your credit score? Remember that your credit score is a numerical representation of how well you handled your credit. If you paid on time and if you did not use too much of your balance then you are sure to have a good credit score. If you already have a poor score, then it may take some time to get it in order, but there are definitely some steps that you can take. You can definitely set things in order if you are really determined in doing the right thing.