Debunking Credit Myths: What Can and Can't Help You Improve Your Credit Score
Your credit score is what potential lenders check to see how often you have made your payments on time, how much credit you use, how much credit you still have left to use, and whether or not a debt collector is collecting on bills you still owe. These credit scores help potential lenders or landlords make predictions about whether or not you will be able to make payments and whether or not you will make them on time. Your credit score also plays a role in what interest rates you will be offered when taking out a loan. Since your credit report helps others make decisions about your financial reliability, it is important to know how your actions can improve your credit score. Keep reading for some common credit score myths debunked.
Myth 1: Checking Your Credit Score Hurts It
It is a common misconception that checking on your credit score can end up hurting it. Quite the contrary! Checking your credit score will not hurt it and it should actually be done around once a year. When you check your own credit score, it will show up on your personal credit report as a "soft inquiry." However, if you have a family member or friend who works at a bank and you ask her to check your score, this will show up on your report as a "hard inquiry," which is a horse of different color. Hard inquiries show up on your credit report when a lender takes a look at it; these inquiries actually could end up hurting your credit score. Hard inquiries represent potential new debt that you might be taking on, so lenders might take a more negative review of your credit as a result, damaging your credit score.
Myth 2: Only Using Cash Leads to a Good Credit Score
An easy way to ensure that you steer clear of large debts is to only ever pay with cash, check, or debit. While this is a handy way to keep an eye on your budget, never using credit is actually not the best idea for your credit score. In order to have a good credit score (or to start building credit so that you have a score at all), you need to establish and build a good credit history. It is necessary to use credit in order to show that you use it responsibly. Instead of only using cash and debit, use your credit card for small purchases that you'll be able to pay off each month. After about six months of consistent repayment your score will start to climb and you can start making larger purchases.
Myth 3: Closing Accounts Will Increase Your Credit Score
When trying to improve a credit score in a jiffy, some people might think it is a great idea to pay off and close multiple accounts. However, one of the most significant contributors to a person's credit score is the ratio of total balances to total credit limits. After closing off accounts, you bring down your total credit limit, which skews the ratio against your favor. It is generally a good idea to keep the total amount of credit that you are using at or below thirty percent of your credit limit. If you want to close off certain accounts so that you have fewer things to worry about, just make sure that you can maintain this thirty percent ratio afterwards. Another tidbit to keep in mind: an open account with a good credit history associated with it will stay on your credit report indefinitely, while an account that has been paid off and closed, even if its history was sterling, will be removed from your credit report after 10 years.
If you're hoping to build good credit or boost a credit score, it's important to know what affects your credit score and what doesn't.
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