Credit scores play a crucial role in our financial lives and decisions. Not only do they affect our ability to procure favourable interest rates but they also make it easier to rent or buy a home.
Despite their importance, credit scores are still shrouded in mystery and surrounded by countless misconceptions. With so many credit score myths revolving around the market, you may feel overwhelmed and unsure what to believe. Thus, making it more difficult to manage your credit score.
However, by being able to differentiate between credit score myths and facts, you can take control of your financial well-being and make well-informed decisions.
That’s why, today, we’re going to debunk five such credit score myths that may stand in the way of you effectively understanding and managing your credit score.
Myth 1: A Larger Credit Card Balance Improves Your Score
Contrary to popular belief, carrying a high balance on your credit card does not improve your credit score in any way. In fact, there are many ways in which doing so could lower your credit score. By keeping a larger amount on your credit card, you may end up increasing your credit utilisation rate.
Your credit utilisation rate is used to describe how much of your total credit you currently use. If this ratio is large, your creditworthiness will suffer as a result. That’s why you need to keep tabs on how much available credit you utilise.
The longer you maintain a higher balance, the more interest and other costs you accrue, which may hurt your credit score. While responsible use of your credit card could raise your credit score, needlessly keeping a big balance has no positive effect and could actually have the opposite effect.
Myth 2: Checking Your Credit Report Will Hurt Your Score
You may have heard that checking your credit report can lower your score. However, this is completely untrue, checking your credit report has no impact on your credit score whatsoever.
Checking your credit score is categorised as a ‘soft inquiry’. As such, it will not affect your credit score in any way and never plays a factor in credit-scoring models. However, there are also certain actions, like applying for a credit card, that are categorised as ‘hard inquiries,’ which could negatively impact your credit score.
If you want to be financially responsible, it’s recommended to check your credit report at least once a year, to ensure everything is accurate. As such, monitoring your score helps you track your progress while also offering tips for building credit worth.
Myth 3: A Higher Income Equals Better Score
While amongst the more seemingly believable credit score myths, this one is completely untrue. Having a higher salary does not automatically result in a higher credit score.
The truth is that there are six important factors that define your credit score – your payment history, outstanding debts, percentage of credit limit used, current credit activity, credit age and mix, and accessible credit. Given these other factors coming into play, a higher income does not automatically equate to a higher credit score.
If you wish to increase your credit score, you need to focus on maintaining timely bill payments, never exceeding 30% of your available credit and making smart decisions regarding any debt you have.
Myth 4: Close Old Credit Cards and Accounts to Improve Your Balance
This is another common misconception and the truth is quite the opposite. Your credit score could take a significant hit if you were to close your credit card or accounts.
When you close your bank account or credit card, you reduce your total credit limit and as we covered earlier, this would negatively impact your credit utilisation ratio. Consequently, this reduction of accessible credit could end up lowering your score.
Upon cancelling a credit card, you would no longer be able to reap the positive effect of the account’s age and payment history.
That’s why you shouldn’t rush to cut up your credit cards or instantly close your accounts to maintain a high credit score. In fact, keeping your oldest accounts open, using them periodically, and paying them off in full every month is a much better idea.
Myth 5: Bad Credit Scores Will Last Forever
Do you really believe that’s the case? Not at all. In fact, this is one of the most damaging attitudes to have when it comes to fixing your credit score. No matter how hopeless you feel, there are always things you can do to improve your credit score.
It could take months or even years to raise your credit score from its low trenches to an improved position, but it’s still possible. However, it’s worth knowing that the impact of negative items does decrease over time, and most items fall off your credit report post seven years.
As long as you responsibly manage your credit, avoid late payments and don’t max out your cards, you can gradually improve your credit score to as high as you want it to be. Just as it takes time to develop a bad credit score, it also takes time to turn it around, but it’s worth the effort.
Choose Salad Money for Fair and Affordable Personal Loans
Now that you know which credit score myths are not true, you probably have a better understanding of your credit score and how you could improve it.
However, at Salad Money, we don’t believe that you should be defined by your credit score alone. That’s why we use an open banking-based affordability assessment system to determine your ability to repay your loans. This allows us to provide you with the loans you deserve, irrespective of your credit score.
With us, you can rest assured that you’re dealing with a trustworthy and FCA Authorised lender that has nothing but your best interests at heart.
To learn more about how our services work, click here or apply for a loan now!