There is a lot of information floating in the market about credit reports. While some of them are correct, many beliefs are misleading. You also believe in a credit score myth. It is time to do a reality check and prevent yourself from making a costly financial mistake!
Top Credit Myths
Here, we list some of the most common credit myths, followed by the correct details, as we try to clear up the confusion!
Myth 1: Checking Your Credit Report Lowers the Credit Score
Many people do not check their credit report often, fearing a negative impact on their credit score. Please be informed that checking your own credit bureau score does not change it.
There are two types of credit inquiries. If you connect with one of the credit bureaus to check your credit, it is called a ‘soft inquiry.’ When a lender checks your credit and fully evaluates it, before loan approval, it is called a ‘hard inquiry’. Soft inquiry does not impact your credit score. However, multiple hard inquiries can dent your score. A soft inquiry gives you important financial health insights. So, check your own credit score without any worry! To access credit reports for free, connect with DueFactory, and you will not impact your score!
Myth 2: Closing Your Credit Card Will Make Your Credit Score Better
Closing a credit card does not improve your credit score in the short term. However, it may do the opposite. Yes, closing a credit card will mean lowering your credit length, an important determinant in calculating your credit score. Also, how much credit you can avail impacts your credit utilization. Credit utilization is a ratio that compares the amount of credit you use v/s and how much credit availability you have. Lowering the credit history would increase the ratio and impact your score negatively.
However, closing a credit card makes sense if the card has an annual fee. If the card does not charge you any free and offers rewards, keeping it is better for your credit health.
Myth 3: You Cannot Get Credit Report Error Corrected
Even credit bureaus can make mistakes! Sometimes, you may observe that your closed account is still reflecting unpaid or your paid-off loans are not correctly updated. It is also possible that there are other errors on your credit report, causing your score to drop. But what many people do not know is that your credit report errors can be fixed. You can easily contact the credit bureaus like CIBIL, Experian, and CRIF directly and report the error. You will have to submit certain documents proving the error. The bureau will investigate the mistake and correct the same after validation. Remember, you can only get errors removed from your credit report, not bankruptcy or late loan repayment entry.
If you notice any fraudulent activity, like finding accounts you didn’t open in your name, you can also report this to the bureau!
Myth 4: Carrying a Balance on Credit Card Increases Credit Score
Carrying a balance on your credit card cannot increase your credit score, but it can hurt it. Paying interest on the balance doesn’t make sense. So, a credit tip for you is, if you can pay off your credit card bill in full every month, nothing like it! Keeping balances on your account can upset your credit utilization ratio. With an increase in the credit card balance, the utilization rate also increases, which brings your credit score down.
Myth 5: Low Income means Low Credit Score
Many people think that the size of your paycheck determines whether you have a good or bad CIBIL score. But the fact is that the salary or income has no relation to credit. The income figure does not impact your score, as the credit scoring models do not consider wealth metrics. You must know that credit improvement factors are your payment history, amounts owed, length of credit, credit mix, new credit, etc., and not your paycheck.
Also, having a good credit score does not make you rich. Earning well may increase your credit limit, but income does not impact your credit score directly.
Myth 6: Paying Debt Can Increase Credit Score
True in the case of credit card debt but not for installment debt. Being debt-free may not impact your credit score positively. Paying off your auto loan may lower your score as you will have fewer credit accounts. Paying off credit card debt first can help you with credit building.
Myth 7: You Cannot Improve Your Credit Score
Credit scores keep changing frequently. If you have a poor score, it can be improved. To raise your credit score, you must monitor your credit report, dispute errors, make more than minimum monthly payments, clear off your debts, try to lift your credit utilization ratio, etc. If you have a history of bankruptcy or late payment, be patient and practice healthy payment habits to improve your credit score gradually.
Wrapping up
These were some of the most prevalent credit myths. Now that you know the reality, you can make the correct decisions to maintain a financial wellness. By making consistent and on-time payments, you can see an increase in your credit score. Maintaining a diverse credit mix can also help you boost your score. The older your credit history, the better it is for your credit score. Engage in such positive financial habits and lead your way toward success.
FAQs
1. Will paying off Debt immediately increase my credit score?
Ans. Debt management or paying off debts is good for your financial life but improves your creditworthiness over time. You need to be patient and not expect quick results.
2. I have a bad loan lingering in my credit report. What should I do?
Ans. Ensure to make bad loan repayment through Due Factory and not let an old issue hamper your credit score anymore.
3. Does checking my credit score lower it?
Ans. Credit scores do not get impacted by your own credit report check. You must monitor your credit report often to ensure personal and account information authenticity and prevent fraud.
4. Can I improve my bad credit score?
Ans. If you have a poor credit score, it can be improved gradually. To raise your credit score, monitor your credit report, dispute errors, make more than minimum monthly payments, clear off your debts, keep optimum credit utilization ratio up, etc.
5. What things does my credit score ignore?
Ans. Your credit report ignores your race, color, nationality, gender, religion, marital status, and income.
6. If my salary is less, does it mean I will have a low credit score?
Ans. The size of your paycheck does not impact your credit score. The credit scoring models do not consider your income or salary. What matters are your payment history, amounts owed, length of credit, credit mix, new credit, etc.
7. My credit report has an error. How important is to get it corrected?
Ans. If you observe that your credit report has some anomaly, like a closed account reflecting as unpaid, paid-off loans not updated, wrong account name, wrong credit limit, etc., contact the credit bureaus and get the error corrected. These errors might drop your credit score, and hence it is important to fix the errors.