Having a good credit score can be incredibly beneficial when it comes to qualifying for credit cards, loans, and mortgages. It can even lead to better interest rates and terms, helping you to save money and get ahead financially.
However, there are several myths and misconceptions about credit scores that can lead to confusion and misinformation.
Now let’s start with the first myth.
1. People are born with a credit score
Your credit score is initially created when a lender or other organization requests information about your credit history and creditworthiness, typically when you apply for a credit card, loan, or other financial product. This information is used to calculate your credit score, which is a numerical representation of your creditworthiness.
However, your credit score is not set in stone and can change over time based on your financial behaviors. One of the best ways to establish and maintain good credit is to use credit responsibly. This means opening credit accounts, such as credit cards, and using them responsibly by making purchases and paying off the balances in full each month. This demonstrates to lenders that you are able to manage credit responsibly and can help improve your credit score over time.
2. You only have one credit score
While credit reporting agencies generally use similar models to calculate credit scores, there may be some slight differences in how they weigh certain factors. As a result, your credit score may vary slightly depending on which credit reporting agency you are looking at.
For example, the credit score calculated by Experian might be slightly different from the score calculated by FICO. This is because each agency has its own formula for calculating credit scores, which takes into account a variety of factors such as payment history, credit utilization, length of credit history, and new credit inquiries.
It’s worth noting that these differences in credit scores are generally small and shouldn’t be cause for major concern. However, if you notice a significant difference between your scores from different agencies, it’s worth looking into why that might be the case. This could involve reviewing your credit report for errors or inaccuracies, or taking steps to improve your credit in areas where it may be weaker.
3. Carrying a high credit card balance increases credit score
It is not a good idea to carry high balances on your credit cards. In fact, it is recommended to keep your credit utilization rate as low as possible. Credit utilization refers to the amount of credit you are using compared to the credit limit you have.
One effective strategy to maintain a high credit score is to pay off your entire credit card balance by the due date each month. This shows lenders that you are responsible with your credit and can manage it effectively. By paying off your balance in full each month, you can avoid accruing interest charges and late fees, which can negatively impact your credit score over time.
In addition, maintaining a low credit utilization rate can help you avoid maxing out your credit cards, which can be a warning sign to lenders that you may be overextended financially.
4. Credit score drops every time you check it
Your credit score doesn’t drop every time you check it. Fortunately, there are several options available to individuals who want to check their credit score for free without causing any negative impact. For instance, you can use services like Experian and Credit Karma to obtain your credit score without incurring any charges or harming your credit score.
It is important to note that some individuals may confuse hard credit checks with these free credit score checks. Hard credit checks, also known as hard inquiries, are typically performed by lenders when you apply for a new credit card, loan, or mortgage. These inquiries can potentially lower your credit score by a few points. However, soft credit checks, such as those provided by Experian and Credit Karma, do not have any impact on your credit score.
It is generally recommended that individuals check their credit score regularly to stay informed about their creditworthiness and detect any potential errors or fraudulent activity on their credit reports. By monitoring your credit score on a regular basis, you can take steps to improve your credit and achieve your financial goals.
5. Using debit card boosts your credit score
If you prefer not to use a credit card due to the risk and accountability it carries, using a debit card may be a safer option. However, keep in mind that debit card usage is directly linked to your checking account and does not impact your credit score in any way.
Using a debit card allows you to only spend the money you have in your account and eliminates the possibility of accumulating debt. However, it also means you are not building a credit history, which can be detrimental if you ever want to take out a loan or apply for a credit card in the future.
It’s important to consider your financial goals and priorities before deciding which type of card to use. If building your credit score is important, using a credit card responsibly and paying off the balance in full each month can help you achieve that goal.
