There are a lot of false ideas about credit circulating the community which can affect your financial decisions. Today let us discuss the most common credit myths and the truths behind them. Hopefully, after reading this article, you will be enlightened on financial matters and make personal decisions based on facts, not on rumours.
Myth No. 1: “Checking your own credit report will lower your credit score.”
Some people might be afraid to order a copy of their personal reports too often, thinking that it can affect their rating. But that is not true. Checking your personal credit report will not lower or increase your credit score. In fact, consumers are strongly advised to personally check their credit reports at least twice a year or any time before submitting new credit application to make sure that your file does not contain errors, unauthorized charges and wrong remarks.
Myth No. 2: “It’s okay to submit multiple credit applications to different lenders at the same time.”
Do you submit credit card applications or loan applications to different companies just to see your chances of getting approved? Now that can hurt your credit score. Each time you submit a credit application, the creditor will inquire your credit history. This is known as a “hard inquiry”. Unfortunately, too many inquiries can send a negative impression to lenders and can pull down your score by several points. Do your research first before submitting application to your chosen company.
Myth No. 3: “A lower credit limit will protect your credit score”.
The truth is that you can get a high credit score whether you have a low or high limit. The result will depend on how you use that limit. However, a lower credit line puts you at a greater risk of a low credit score because you can max out your limit more easily. If you’re aiming for an excellent rating, keep your credit usage minimal, ideally about 20% or 10% each month.
Myth No. 4: “Carrying a credit card balance can raise your score.”
There is no need for you to leave a balance on any of your credit cards to get a good score. In fact, cardholders are advised to completely pay off their monthly balances to reduce the risk of debt build-up and to eliminate interest rate fees.
Myth No. 5: “You should never use your credit card to protect your score.”
While maxing on your credit limit can hurt your score, not using credit can be damaging as well. If you never use your credit cards, then you will not be building your credit history at all. To build credit history, you need to use your credit card on minimal purchases. Building good credit is all about managing debt and repayment effectively.
Myth No. 6: “All creditors use the FICO scoring system.”
The FICO scoring system is the one most widely used by financial organizations but there are many variations and some lenders use their own formulas to calculate credit scores. The FICO scoring model uses the five criteria which are: payment history (35%), credit usage (30%), length of history (15%), types of credit (10%), new credit (10%). Getting to know these factors should give you a better understanding on how you can build and maintain a good credit rating.
About the Author:
Suzy Vanstrusen is a credit analyst and a writer on the website EZCreditRepairSolutions.com. She has been providing consumers with tips and wise information about credit repair as well as helping you out more with your bad credit loans. Copyright © 2011