Understanding your credit score is essential to surviving in today’s economy. Not only does it impact your ability to buy a car or rent or buy a house, but more and more employers and insurance companies are factoring your credit rating into their decision to hire or insure you.
A good first step in developing and maintaining a strong rating, is understanding what does and does not affect your score. To this end, we have identified the following three common myths:
1. Checking your own credit will lower your score Credit inquiries only result in points being taken from your score when they are made by potential lenders. And even in this case, several inquires made within 30-45 days are generally treated as one inquiry so shopping around for a loan is not damaging. Checking your own credit never results in points being taken away, nor do inquires made by landlords or potential employers made at your request. In fact, checking your own credit regularly can be an important first step to getting a loan or applying for a job. Errors on your report or identity theft activity can both result in lowered scores and should be disputed or corrected prior to applying for credit or employment.
2. You can improve your credit score by closing old accounts Credit scores are based, in part, on the difference between your available credit, and the amount you owe. Closing your accounts reduces your available credit which narrows the gap between your available credit and your debt. As a result, closing accounts can actually damage your credit score. Credit card companies also need to see that you can manage several open accounts responsibly, so the recommendation is that you use and maintain 3-4 open accounts.
3. Paying off your debts immediately will fix a low credit score Reducing your debt will certainly improve your credit score. However, because your credit score is a reflection of how you manage your finances over time, your payment history is weighted far more heavily than your current status. Paying off debts will not erase years of late or missed payments that may be reflected in your score.
As a result, in the event you receive a large sum of money (e.g. a bonus or inheritance) it may be better to pay some of it off and then make regular, timely payments with the balance to demonstrate improved fiscal responsibility.