Debunking Common Myths About Credit Scores When Borrowing Money

Credit scores play a pivotal role in our financial lives, influencing our ability to borrow money, secure favorable interest rates, and even land a job or rent an apartment. However, the world of credit scores is concealed in misconceptions that can significantly impact our financial decisions. 

Understanding the truth behind these common credit score myths is essential for making informed financial decisions when borrowing money. Let’s debunk some common myths about credit scores that you should remember when seeking financing.

Checking Your Credit Score Lowers It

One prevalent myth is the belief that checking your credit score will have a negative impact on it. In reality, there are two types of credit inquiries: soft inquiries and hard inquiries

Soft inquiries, such as when you check your credit score or when a potential employer does a background check, do not affect your credit score. 

On the other hand, hard inquiries, which occur when you apply for credit, may have a minimal and temporary impact on your score. It’s essential to be aware of the distinction and not shy away from monitoring your credit score regularly. 

Closing Credit Cards Improves Your Credit Score

Some believe closing old or unused credit cards can boost their credit score. However, this myth is misleading. Closing a credit card account can harm your credit score, as it reduces your overall available credit and may increase your credit utilization ratio. 

This ratio compares the amount of credit you’re using to your total credit. A lower ratio is generally better for your credit score, so keeping old credit cards open, even if unused, can contribute positively to your creditworthiness. 

All Debts Are Equal in the Eyes of Credit Scores

Another common misconception is that all types of debt are treated equally by credit scoring models. In reality, credit scoring models consider various types of debt differently. For instance, credit cards and installment loans are viewed differently. Credit cards are considered revolving credit; a lower credit utilization ratio can positively impact your score. 

On the other hand, installment loans, such as car loans or mortgages, are seen as installment credit. However, these loans can also help improve your credit score when you make prompt payments. For example, if you take online cash loans to fund unforeseen expenses, having a payment plan and promptly paying off your debt can gradually improve your credit score. Timely payments regarding the loan’s deadline show lenders that you are a dependable borrower.

Closing Delinquent Accounts Removes Them from Your Credit Report

Some believe closing delinquent accounts will erase them from their credit report. However, this is not the case. Delinquent accounts, such as those in collections or with late payments, can remain on your credit report for seven years from the date of the first delinquency. 

Closing the account does not erase the adverse history. Instead, focus on rebuilding your credit by making timely payments and gradually demonstrating responsible financial behavior. 

A Good Income Guarantees a High Credit Score

While a steady and substantial income is undoubtedly beneficial for your financial well-being, it doesn’t directly determine your credit score. Credit scores are primarily based on your credit history, payment behavior, credit utilization, length of credit history, and other factors. 

A high income may help you qualify for larger loans, but it won’t automatically translate into an excellent credit score. Managing your debts responsibly, making timely payments, and maintaining a healthy credit profile, regardless of income level, is crucial.

Leave a Comment