Five Common Credit Score Myths
When it comes to credit scores there are a lot of myths, which can cause consumers to make poor decisions about their credit card use. Here is a list of the most common misconceptions (and why you shouldn’t believe them):
Closing old credit cards will improve your credit score
One very common misconception is that closing out old, unused credit cards will help your score. If you have maintained a credit card for a length of time, it helps show long tradelines on your credit report. Tradelines are credit accounts that are posted to your credit report by your credit card company. Long tradelines are beneficial to your credit score because they prove that you have demonstrated the ability to repay your debt over a substantial period of time. In actuality, closing these old cards can be detrimental to your credit score.
Being a co-signer won’t affect your score
A co-signer is liable for all debts if the primary borrower does not stay current on payments. Being a co-borrower or co-signer signs you up for potentially good credit (if payments are made on time) or very poor credit (if any payments are missed). Being a co-signer could also count as debt against you when you try to borrow in the future, so carefully consider whether you are willing to risk your creditworthiness to help a friend or family member
Your credit score drops when you check it
When you check your own credit, it is considered a soft pull inquiry. When a dealership, bank, housing authority, or potential employer obtains a credit report, it’s considered a hard inquiry and that is the type of inquiry that impacts your score negatively. In addition, when a credit report is pulled at a dealership, they send it out to many institutions to see where you can get the best interest rate; this can significantly drop your score. Many credit score apps are considered a soft inquiry, so go ahead and sign up for one to monitor your score if you wish.
Paying a charge off removes it from your credit report
Charged off accounts are accounts where you did not fulfill your loan obligation and the institution charged off, or sold, your bad debt. Many people think that once you pay your outstanding debt, it drops off of your credit report. Paying off your old and outstanding debt helps to improve your score, but it will remain on your credit report for 7 to 10 years.
It’s good to leave a balance on your credit card each month
I often hear people say that they leave a balance on their credit card(s) in order to improve their score. They pay the minimum balance and think the remaining statement balance helps to increase their score. This is incorrect for several reasons. Making the minimum payments on time will help your credit score, but by paying off your statement balance each month, you both improve your score and save money you would have otherwise spent on interest. It can also be detrimental to your score if you get too close to your credit limit. When in doubt, try to adhere to the 30% rule (e.g. your balance should equal no more than 30% of your credit limit).
Take excellent care of your credit score. Most employers and landlords look into the credit worthiness of applicants. Having a low score could negatively affect your life. Be mindful of these tips and you’re sure to get your credit score on the right track.
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