It is true that what you don’t know about your credit score can hurt you. But it is also equally destructive if you had been believing the wrong things about credit scores all this time.
Some people are probably still confused about their credit report and the score that is derived from it. While the calculation is actually difficult to guess, those in charged of computing it are transparent about the factors that can affect it. All you really need to do is to make sure that these factors are taken cared of for you to have a great score.
The important thing that you need to know is that your credit rating is an important measurement of your credit behavior. By behavior, we mean your ability to manage your credit and pay it off responsibly. The more you lack in terms of credit management, the less appealing your score would be. That could affect your chances of getting a loan to buy a home, finance your business or secure financial aid for a higher education. If you wish to avoid any problems in case you need any of these loans, you need to pay attention to the condition of your credit score.
Here is a video that will briefly define what this credit rating really is.
5 myths about credit rating that you need to forget
After having defined what a credit score is, let us now discuss the popular misconceptions about this financial term. It is easy to be confused about this score. Some people are so baffled that they end up not trying to understand it at all. Well that could cost you in the long run because ignorance is never bliss – especially when it comes to your finances.
There are so many myths concerning your credit rating and here are 5 that you probably haven’t heard of before.
Myth 1: You only have to worry about 1 credit score.
Let us get one thing straight – there is more than one source of this credit rating and they are handled by different companies or agencies. Each of them have different formulas and you need to be aware of the varying credit score ranges. Sometimes, you think that you are in great shape but you are actually looking at the wrong range. For instance, a FICO score range is 300 to 850. The PLUS Score made available by Experian is only for consumers and has a range of 330 to 830. If you look at the latter and you got a 700, you would think that everything is well. But what if the lender used the FICO Score and the what you thought was sufficient was actually lower? You need to know what score the lender will be using so you can understand and probably negotiate a better loan term with them.
Myth 2: Credit elimination is the key to increase your credit score.
When the Great Recession happened, people suffered so much because of the debts that they owed. Some American consumers said to themselves that they would never put themselves in that position again. They worked hard to get rid of their debts and they thought everything will be okay. But while you may think that a life without any credit is great, the same cannot be said about your credit score. As defined earlier in this article, this is how you can measure your credit behavior. If you do not have any credit, how can you have a credit score? Paying for cash will not improve your credit rating. You need to use credit and then display good behavior in paying it back. The best way to improve your credit rating is to use your credit cards and pay it back in full each month. According to CreditCards.com, you can understand how closing credit cards may seem like a good idea to improve your score. But that is not the case. You will actually cause the credit utilization in your credit report to rise. That can pull your credit score down.
Myth 3: Your assets will affect your credit score.
This is not true. The credit bureaus who are collecting your credit information will never look at your bank accounts. They do not care how much you earn and how many assets you have. All they care about is how you behave when it comes to your credit obligations. The only time that your bank account will have an effect is when your checks are starting to bounce. But if it is overflowing with funds and yet you are still missing out on your payments, your credit score will really suffer. Your savings will have an effect if you know how to use it in relation to your credit. For instance, if your funds are suddenly compromised, you do not have to delay debt payments if you have sufficient reserve funds.
Myth 4: Your educational background will affect your credit score.
Your college degree will not help your credit score if you do not know how to manage your debts. The ones computing your score will not care if you have a masteral or not. As mentioned, your assets will not be a part of your credit report. So the high income that you are earning because of your educational background will not matter if you cannot pay your dues. In fact, some college graduates have a low credit score because they are having a hard time paying off their student loans. If you can use your education to help you understand how to manage both your money and your debts, that can help improve your score – if you can implement it correctly.
Myth 5: A bad credit score can compromise employment opportunities.
In the past, this was a problem. But legislators realized that this is not a fair way of finding great talent. According to an article from Forbes.com, Senator Elizabeth Warren (Massachusetts) will work to end this practice of being biased to job applicants with a low credit score. She believes that this is unfair and through the Equal Employment for All Act, seeks to eradicate this practice. While there is no law prohibiting employers from looking at the credit report of applicants, it should not be the reason for a job applicant to be turned down for the job.
How to avoid ruining your credit report
According to the latest State of Credit published on Experian.com, there is an improvement in the credit score of American consumers. Compared to 2013, the 2014 State of Credit revealed that there is an increase of 2 points in the average credit score in the nation. Now, the score is 666. This is great news but that does not mean you should be relaxed already. Taking care of your score takes constant effort.
Your credit score needs attention and you can expect that this will be necessary for the rest of your life. Here are a couple of tips that you can follow to make sure your credit rating will never be ruined.
- Do not eliminate credit. As explained earlier, eliminating credit will not help your score. You need use credit every now and then so the credit bureaus can record that activity and your behavior in paying it off. Using your credit card and paying off the balance in full at the end of each month is the best way for you to do that.
- Pay your dues on time. Late payment is a big factor in your credit score computation. You do not want them to bring your score down. Not only that, you will be saving money by avoiding the charges incurred by a late payment.
- Always check your credit report. You may be responsible with your credit management but if you fail to check your credit report, you may not realize that you are already a victim of identity theft. Someone may already be using your name to borrow money and not pay it off. If you cannot report this immediately, you might end up with a bad credit score and a debt that you never benefited from, but you need to pay.