Do you know that paying off your debt doesn’t improve your credit score? Well, it does but not overnight or right away. The above statement is just one of the myths people tend to believe about credit. Some of those myths happen to start from a simple misunderstanding, and we never bothered to ask again if they’re true or not. It may seem harmless but these simple misunderstandings could have a negative impact on your credit worthiness, which then translates to higher interests on debts and credit cards.
It’s time to take a second look at these credit myths and correct them.
Closing credit card accounts will improve your credit score
You might be thinking that if you pay off and close your credit card account, your credit history for that account will be deleted from your credit report. Hence, your credit score will improve. Not true at all.
If the account you are trying to close has a high credit limit and low balance (which is why it’s easier for you to pay it off), then you run the risk of getting your total credit limit significantly reduced. This can negatively affect the ratio of your debt to available credit, or credit utilization rate, which is a major factor in most credit scoring models. If you have $40,000 total credit limit and your debt is $30,000 (by the way, that is a good time to think about debt solutions), and the account you are trying to close has $8,000 credit limit, then you are already using almost 100% of your total available limit. Credit bureaus will start thinking that you are overextended, and creditors see this as a red flag when transacting with you in the future.
Instead of closing credit accounts, just pay the account off and lock the card away throw away the key.
Checking your credit will affect your credit score
This is a basic misunderstanding. Checking your own credit is considered as a “soft inquiry” and this will have no impact on your credit score. In fact it is important to check your own credit report to be able to see how well you are doing with your credit.
Getting your credit checked by others, such as when you are opening new credit card account, is called a “hard inquiry” and that is what costs a few points off your credit score. The more hard inquiries you get, especially if you are applying for too many credit cards at the same time, the harder the impact it will have on your credit score.
Paying bills on time should give you an excellent credit score
Fact: Paying bills on time is an excellent habit, but it does not automatically lead to an excellent credit score. Yes, it is a major factor in most credit scoring models but it is not the only factor. The total amount of debt you have versus your total credit limit, the age of you credit history, new credit inquiries, and the mix of credit accounts you have all play a part in your credit score.
You can’t get credit if you don’t have it already
Fact: It may be difficult to establish credit if you don’t have it yet, but it is not impossible. When lenders review credit applications, they look at four elements, namely, your identification, credit history, public records, and inquiries. If there is no previous history yet, he or she can get someone to co-sign, or be added as an authorized user of an account. In the absence of any of these, it might also be a good idea to get a secured credit card, a type of credit card with a cash collateral. After a few months or a year of using a secured card, your credit history will have been established and you can already ask your creditor for a non-secured credit card.
Income afffects credit score
Fact: True to its name, credit score is only all about credit. Your level of income, properties and assets, stocks, bonds, bank accounts, even your level of education has no bearing on your credit score as it only pertains to debt-related information. An individual with a high level of income but a bad credit score could be denied on a loan by creditors, while an ordinary income earner with an excellent credit score, could have access to excellent credit rates. In a way, credit score does not discriminate based on anyone’s social standing. It just does what it’s designed to do.
When applying for joint accounts, the spouse with a lower credit score need not worry because the other’s credit score will be do
Fact: There is no such thing as joint credit scores, but in cases where one spouse do not qualify for a loan, such as when there is an annual income threshold required, and you need to combine your income in order to qualify, then both of you credit scores will be considered. If one of you has poor credit, it could affect your interest rates or fees, or worse, you could be denied of a loan application.
Paying minimum balance is OK as long as you pay on time
Fact: This is not Ok. In fact, it’s a terrible idea. You might be thinking that because payment history is a major factor in your credit score, it is perfectly fine to pay the minimum as long as you pay it on time. The problem is that paying only minimum increases your debt load quickly, which means you will have be utilizing a higher percentage of your total available credit, which only negates your good payment history. Another problem — a bigger one! — is that the interest charged upon you will become part of your total debt amount. And as you know, the higher the total debt amount, the higher the interest you will incur on the next billing cycle. The cycle goes on and on, until debt becomes too much to handle.
You can always start over with a new credit identity
Of all the myths that you might have believed, this is probably the most dangerous as it can put you behind bars. No, you cannot start over with a new credit report by getting a new credit identity. The only way to get a new credit identity is by means of fraud or identity theft and that is against the law.
If you want to start over, you will have to do it slowly, diligently, and legally. You will have to pay off your debts and rebuild your credit block by block. But don’t worry, there are solutions and institutions like Financial Rescue LLC ready to help you with that. It will take time, but the lessons you will learn along the way will help you better handle credit in the future.