Several Misconceptions about Your Credit Score
You may be like millions of other Americans and feel a little confused when it comes to your credit score. Maybe you’ve heard rumors about what a credit score is, what it means, or what a good score is. But the truth is some people are out there telling you the wrong information. Some people have no idea what they’re talking about and continue to talk about it as if they do.
No worries. Here is a clear explanation concerning your credit score. You will learn what a credit score is, what it means, and what a good score is. You will also see some of the most common misconceptions when it comes to your credit score.
Your Credit Score in a Nutshell
Also called FICO, your credit score is a number that tells prospective creditors of your creditworthiness. Depending on your credit score a creditor may or may not give you the credit you have requested.
Your credit score reflects the risk of default. If you have a credit score below 600, your credit score is considered “poor.” If you have a credit score above 720, your credit is considered to be “good.” With poor credit, you show a higher risk of defaulting on your credit payments. On the other hand, with good credit, you show lower risk of defaulting on your credit payments. With a higher credit score, many creditors will consider you to be worthy of their credit.
Misconception #1: Checking Your Credit
Many people believe that if you check your credit, your credit score will be dropped. NOT TRUE. It’s okay for you to stop worrying and check your credit occasionally. It’s recommended that you do check your credit occasionally in order to stay on top of mistakes that may be on it. The credit bureaus aren’t perfect and they often make mistakes.
“Soft inquiry” is the name given to a consumer’s inquiry into his or her own credit report. Doing this doesn’t change your credit score one bit. If a lender checks into your credit report, it’s deemed a “hard inquiry” and yes, you will lose a few points on your credit score. But since it’s your own credit report, go ahead and take a peek, there’s no penalty.
Misconception #2: Negative Accounts
You may have heard many people say that if you have a negative account on your credit report, you can pay it off and it’ll be taken off your report. Again, this is not true. Yes, if you have anything negative on your account you want to take care of it. Whether that means paying it off, making arrangements with the creditor, or filing a dispute, the sooner you handle it, the better.
Paying off a negative debt will show prospective creditors that you have integrity and that you are taking care of your financial obligations. But they will still be able to see that it was negative. The credit bureau does not erase the debt. Instead, they will mark the debt as “paid.” This negative debt will stay on your credit report for 7-10 years after the first date that it was added to your report. Paying off your debt may improve your credit score a little, but when it is completely off your report is when you’ll see a real improvement.
It’s not all bad news though. Depending on the creditor that you’re trying to do business with, they will most likely take into account your recent efforts to pay off the debt that you owed. Your credit score is not the only deciding factor in every case.
Misconception #3: Old Accounts
Closing an old account will not raise your credit score. You may have heard other people advising their friends to close up their old accounts and just keep their new, active ones open in order to maintain a higher credit score.
In this case, the older the better. It’s your older accounts that will give you the best boost in your credit score. Since you’ve had them so long, they serve as a voucher that you have been responsible on an ongoing basis.
When you open a new account, there’s no time behind it to back up your credit history. So, if you have too many open accounts and you want to close some, close the newest ones instead. The older accounts are much more valuable for your credit score.
Even if you choose to reduce the limit on your oldest account, it will still benefit you. You can reduce the limit on that account and increase it on a newer account if you’d like. But don’t close that old account; you may actually lose points on your credit score if you do.
Hopefully now you’re clear about your credit score and the top three misconceptions about it. When somebody tries to give you false information about credit make sure you do your own research before you listen to him or her. You may save yourself a headache or two.
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