Credit plays a crucial role in financial health, yet misinformation about how credit works is widespread. Falling for these myths can lead to poor financial decisions that negatively impact your credit score. Let’s debunk some of the most common misconceptions about credit and help you understand how credit truly works.
Many people believe they have a single credit score, but in reality, there are multiple credit scores. Different credit bureaus and scoring models calculate credit scores differently. The most well-known models are FICO and VantageScore, and each lender may use a different one when evaluating your creditworthiness.
Checking your credit report, known as a "soft inquiry," does not negatively affect your credit score. Regularly reviewing your credit report is a smart financial habit that helps you detect errors and fraud early.
Your credit reports from Experian, Equifax, and TransUnion may contain different information. This is because not all lenders report to all three bureaus. It’s essential to check all three reports to ensure accuracy.
Credit bureaus are private companies, not government entities. They collect and maintain credit information to provide lenders with data that helps assess borrowers' risk.
Credit scores do not factor in education level. Credit scoring models assess payment history, credit utilization, length of credit history, credit mix, and new credit applications, but not academic achievement.
Income and savings do not directly impact your credit score. While financial stability can help you manage credit responsibly, your score is based on your credit behaviour rather than your income or savings.
Employers may review a version of your credit report (with your permission), but they do not have access to your credit score. They mainly look at debt levels and payment history to assess financial responsibility.
Married couples do not share a credit report. Each person has an individual credit history. However, joint accounts or co-signed loans can impact both spouses' credit scores.
Divorce itself does not affect credit scores, but shared debts and joint accounts can. If one spouse fails to make payments on a joint account, both credit scores may suffer.
While it may take time to establish credit, it is not impossible. Secured credit cards, credit-builder loans, and becoming an authorized user on someone else’s account can help build a credit history.
Debit and prepaid cards do not impact credit scores because they do not involve borrowing money. Only credit-related products, like credit cards and loans, contribute to credit history.
Paying off a collection account does not erase it from your credit report immediately. It will be marked as "paid," but it can remain on your report for up to seven years.
Closing old accounts can lower your credit score by reducing your available credit and shortening your credit history. Keeping older accounts open can positively impact your score.
Bankruptcy may discharge debts, but it significantly damages your credit score and remains on your credit report for seven to ten years, making it difficult to get new credit.
Each time you apply for new credit, a "hard inquiry" is recorded on your credit report, which can temporarily lower your score. Too many inquiries in a short period may make you appear risky to lenders.
Paying off your credit card balance in full each month is beneficial. It shows responsible credit usage and helps maintain a low credit utilization ratio, which is a key factor in your score.
Having debt does not automatically lower your credit score. The key factor is how well you manage that debt. Making on-time payments and keeping your credit utilization low is more important than the total debt amount.
A low credit score does not mean you will be denied credit forever. Many lenders offer products designed for those with poor credit, such as secured credit cards or credit-builder loans.
Credit scores can drop quickly, especially if you miss a payment or max out your credit cards. Even a single late payment can cause a noticeable decrease.
Credit can be rebuilt over time with responsible financial behaviour Paying bills on time, reducing credit card balances, and avoiding new debt can improve your credit score significantly.
Now that you know the truth about credit, take proactive steps to maintain or improve your score:
Understanding the facts about credit empowers you to make informed financial decisions. By avoiding these common myths, you can build and maintain strong credit that will benefit you for years to come.