5 Common Myths About Credit Scores You Should Know

Credit scores are an important indicator of your financial health, but they are usually misunderstood. A high credit score reflects responsible behaviour with credit and improves your chances of getting a loan approved at a lower rate of interest. Elsewhere, a low credit score might result in increased borrowing costs or make it more difficult for you to obtain credit. Even though credit scores are very important, they are plenty of myths surrounding them that can cause confusion and lead to you making poor financial decisions.

Here are some of the most common myths you should stay aware of.

It is a common misconception that information about previous debts are removed off a person’s credit report when they are paid off. However, this is not true. While paying off a loan may reduce your balance and stop accrual of interest, the negative remarks, such as late payments or collections will stay on your report for up to several years, even after you have cleared the balance.

There is a widespread misconception that filing for bankruptcy permanently damages your credit score, but it’s not true. Though bankruptcy can drastically reduce your credit score and stay on your record for up to 10 years, bankruptcy is not a lifetime issue. You can gradually restore your credit by adopting prudent financial practices, such as on-time bill payment, debt reduction, and credit usage. You can improve your credit score if you are determined enough.

A low income doesn’t necessarily mean a low credit score, although there is a general misconception that income directly impacts one’s credit scores. Credit scores are more influenced by your debt management practices rather than your income. Your credit score can stay high regardless of your income level if you are careful enough to avoid needless debt, pay your payments on time, and maintain modest credit card balances. It’s all about financial discipline, not how much money you make.

It is a general misconception that an individual’s credit score is the same everywhere or with every credit bureau. However, it is not always true all the time. There are many credit bureaus, such as Equifax, Experian, and TransUnion, which have their own set of information. This may lead to very minor differences in your credit score based on each bureau’s reporting. Also, different lenders use different scoring models, so even though your score might be high on one platform, it could be different when applying for credit elsewhere.

There is a commonly observed misperception that your credit score is only impacted by loan applications. The truth is that other activities, such as requesting a credit limit increase or applying for a new credit card, can also affect your credit score. These actions result in hard inquiries which may cause a slight drop in your credit score. While one or two inquiries typically don’t have a significant effect, too many inquiries in a short time can signal financial instability to lenders.