Understanding the Basics of Credit Scores
Your credit score is a numeric measure that financial institutions use to assess your creditworthiness. It is based on a variety of factors, including your payment history, amount of debt you have, the length of your credit history, and the types of credit you use. The higher your score, the more likely you are to be approved for credit and receive favorable interest rates.
Myth 1: Checking Your Credit Score Lowers It
Contrary to popular belief, checking your own credit score, known as a “soft inquiry,” does not negatively impact your credit score. It’s important to regularly monitor your credit report and score for accuracy and possible signs of fraudulent activity.
Myth 2: Closing Old Accounts Will Improve Your Credit Score
Closing old or unused credit accounts may seem like a good idea, but it can actually hurt your credit score. One factor that contributes to your score is the length of your credit history, and closing old accounts can shorten that history.
Myth 3: Paying Off Debt Erases It from Your Credit Report
Paying off debt is an excellent step toward improving your financial health, but it doesn’t erase the fact that the debt existed. Negative items such as late payments, collections, and bankruptcies can remain on your credit report for up to seven years.
Myth 4: All Debt is Bad for Your Credit Score
Not all debt is bad. Creditors and lenders want to see that you can responsibly handle debt. Having a mix of different types of credit, such as a mortgage, a car loan, and credit cards, and regularly making payments on time can actually improve your credit score.
Myth 5: You Only Have One Credit Score
Many people believe they have just one credit score, but in reality, you have several. Different lenders and creditors might use different models or versions of scoring models to calculate your score. This is why it’s not uncommon to find slight variations in your scores from different sources.
