When you’re looking to improve your credit score, whether it’s to secure a better mortgage deal or simply access funds to get your finances back on track, you’ll be faced with a lot of advice.
Unfortunately, not all of this advice is accurate. There are a lot of common misconceptions and myths about what does and doesn’t affect your credit score, as well as how to fix it.
Myth 1: You Only Have 1 Credit Score
First of all, there isn’t one universal credit score. Each country has their own credit agencies or bureaus, and they each have their own reports.
For example, there is Equifax, Experian, and TransUnion in the United States;
So you will have more than one credit score, but it should be similar with each agency. If you do have different scores it could be because one of your creditors reported their information to one agency and not the other. Or it could vary depending on how often your credit information is updated.
Myth 2: Taking Out Credit Damages Your Score
Many people believe that taking out credit damages your score, when in fact, the opposite can be true – if you do so responsibly.
Making numerous applications for credit will result in numerous hard searches appearing on your credit report, which can put off prospective lenders.
However, borrowing through a credit card or other loan and meeting repayments on time is the simplest way to help build your credit score. It will only be damaged if you take out credit and fail to meet repayments.
Myth 3: Your Partner’s Score Impacts Yours
For some reason, a lot of people think that their partner’s financial situation will affect their credit score. But it doesn’t.
Getting married has no impact on your credit score, whatsoever. Even if your marry someone that has a poor credit score or history of missing payments.
Your partner’s credit score will only impact any loans that you take out together.
My husband has a good credit score, but didn’t have much of a credit history when we met. So we have been working together to help him build one. When we bought our new car last year, we put both of our names on the loan. With each monthly payment his score and his history improves, so we will be ready when the times come for us to look into getting a mortgage.
Myth 4: Checking Your Own Credit Score is Bad
If you want your credit score to improve quickly, it can be tempting to check your credit score on a daily basis. The good news is that you can give in to this temptation, if you really want to.
Checking your own score is not recorded on the report anywhere. Only hard checks made by banks and lenders when you apply for credit are stored on your report.
Regularly checking your credit score is a good idea and shows that you are taking responsibility with managing your credit. But obsessing over it isn’t healthy. Most credit agencies update weekly or monthly, so there isn’t much point of checking it daily.
You can sign up for free credit score and credit report monitoring with places like Credit Karma and Borrowell, instead. That way you are alerted whenever there is a change to your credit score, and you don’t have to check on it every day.
Myth 5: Never Close Your Accounts
Closing a bank account or credit card doesn’t always have a negative impact on your credit score, but it can. So it’s important to be aware of what effects closing an account could have.
Closing an account that has little or no funds and a short history will have minimal effect on your credit score, and may not impact it at all. However, closing a credit card with a balance owing on it can hurt your score. So it’s usually better to leave your account open, especially if that account is in good standing.
The same goes if you close a credit card that you don’t use. Closing it will likely lower your score, because it effects your credit utilization ratio. Credit utilization is a big factor in calculating your credit score. It essentially compares the amount of credit you have available (such as a credit card with a $5,000 limit) to the amount of credit you are using (such as having a balance of $3,000 owing on that card). Closing a card that you don’t use means you are reducing the amount of credit you have available, and your credit utilization will go up.
It is important to consider your spending habits, though. If having an open credit card will tempt you to spend, it might be worth taking the hit to your credit score now and close the card so that you don’t end up further in debt instead.
Myth 6: A Better Job and Better Income Improves Your Score
Having a better income will improve your ability to make all your payments on time and rely less on credit, but it doesn’t automatically mean you will have a better credit score.
Bank balances don’t appear in your credit report and neither does your income. So when it comes to your credit score, don’t worry about how much is in your account.
You could have a lot of money but miss making payments, which would hurt your score. Or you could have little savings but make all your payments on time and have a great score.
Even though I’ve pretty much always lived paycheck to paycheck (or close to it), I’ve always had a good (if not great) credit score because I make it a priority to keep up with my payments as best as I can.
Myth 7: Your Credit Score = Your Value
A lot of people, especially those in the personal finance world, put a lot of emphasis on credit scores. And yes, it does matter when it comes to borrowing money. But that’s the only time it matters.
You can be an amazing person and have a low score. Or you could be a horrible person and have a great score. One has nothing to do with the other.
Your credit score has nothing to do your value as a person.
If your credit score isn’t so great, don’t let the social stigma get to you. No one in your life even has to know what your credit score is other than yourself (and maybe your partner).
Instead of worrying about what other people might think, focus on improving your credit score. Pay your bills on time and pay down your debt. So when the time comes that you do need to apply for credit, you will have a better score, and have nothing to be ashamed of.
Understanding how credit scores and credit reports work is an important part of personal finance and money management. It can help you make informed decisions when it comes to your credit and borrowing money, avoid falling for any of these misconceptions or myths, and help you effectively build a better credit score.