Over the years, as the concept of credit score has become more popular, the consumers’ concern with their credit scores have increased. However, people tend to form false assumptions and erroneous beliefs due to few credit score myths. However, these myths are so convincing that people fail to identify these myths, ending up affecting their decision making quite often.
mymoneykarma wants you to be aware of the top 5 credit score myths so that you know how to make the right decisions about your credit:
Myth #1: Checking your credit score hurts your credit score.
There are two ways you can check your credit score : Hard inquiry or soft inquiry.
A soft inquiry or soft pull will not impact your credit score adversely because in this inquiry, a creditor is only reviewing a certain part of your report. Similarly, if you wish to check your credit report through mymoneykarma, it will result in a soft pull. These soft pulls do not knock off points from your credit score.
When you apply for a loan or a new line of credit, and the creditor pulls your entire credit report from the credit bureau. This is known as a hard pull. Hard pulls may impact your credit score minimally. If you are selective when applying for credit and take credit prudently, you will minimize the impact of the hard pull. We would strongly suggest that you regularly monitor your credit report for free at mymoneykarma to ensure that you have a healthy credit score for when you need it.
Myth #2: Credit reports and scores are similar.
People consider credit score and credit reports to be the same thing. That is not correct. Credit reports present your entire credit history with details of the credit that you have taken. On the other hand, the credit score is a number that is calculated based on various factors in your credit history. Due to this myth, people often do not feel the need to review their credit reports and lose the opportunity to improve their credit score.
Myth #3: No credit card or debt = best credit score.
Many people think that no credit leads to a good credit score. That is a huge misconception because without any credit there is no data available on you as a borrower to calculate your credit score. How can you then have a good credit score?
The credit score reflects that you can responsibly handle the credit you take, and that is what the credit reporting agencies certify in your credit report. The credit reporting agencies calculate the credit score by assessing your credit behavior and your propensity toward defaulting.
In the absence of debt and debt servicing history, the lender will assume the worst: that you are a high risk borrower.
A better strategy to have a good credit score would be to have credit cards and some debt — manage them properly by making all payments on time to get a good credit score.
Myth #4: Only a few unpaid accounts show up on a credit report.
Whatever the creditors report to the credit bureaus will show up on your credit report. All outstanding accounts that are reported to a debt collection agency will be reported to the credit bureaus and will appear on your credit report. These include home loans, loans against property, car loans, credit cards and personal loan, to name a few.
You should ensure that you make timely payments of all your loans and don’t let them go into collections. If, for some reason, you are not able to pay your debts in the short run, make sure to clear the debts when you have the money. Submit the proof of payment to the credit reporting agencies if you wish to remove a delinquency record from your credit report.
Myth #5: Paying off debt clears the credit report automatically
Paying off a debt that you have defaulted earlier is undoubtedly a great move. However, don’t assume that it will automatically clean up your credit history. Your credit report shows all types of accounts (positive and negative), including accounts sent to collection, late payments and written offs.
It is important that you regularly review your credit report and check whether the information is accurate. Black marks on your credit report can stay up to 7 years but not past that. In case there are records on your credit report that should have been removed or taken off, you must gather the proof of payment and submit it to all the credit agencies in order to get your credit report cleaned up uniformly.
Educate Yourself to Take Informed Decisions
Reading this is the first step to educating yourself. Once you start taking better and informed credit decisions, your credit score is bound to get better. mymoneykarma has many other such articles that you can read to increase your financial knowledge.