Credit reports and scores have become an essential part of our daily lives. It all began in the 1980s when banks implemented a system to calculate consumers’ creditworthiness. Today, it is crucial to thoroughly understand your credit valuation as a borrower and how it will ultimately affect your borrowing power. However, most consumers have very limited knowledge about what improves their credit score versus what harms it. As a result, their credit ratings have the potential to remain low, making it difficult to make those must-need purchases in the hour they matter most. So, it’s time to educate yourself on 3 misconceptions about credit scores. Read on to enlighten yourself!
Only one type of credit score exists.
Contrary to this belief, there are several models to calculate credit ratings. FICO is the name of the most popular model used by many lenders. The score range is from 300 to 850. The higher the number, the better is your standing as a borrower. But, FICO Scores are just the tip of the iceberg. You may have dozens of other credit scores you’re not aware of. The other main scoring model you’ll run into is the VantageScore. The three major credit-reporting agencies — Equifax, Experian, and TransUnion — teamed up in 2006 to create the independently managed firm VantageScore Solutions, which just released the fourth and latest version of its credit scoring model, the VantageScore 4.0. Keep in mind that scores from different companies may vary by several points.
Checking your credit hurts your score.
Nowadays, not only lenders may request your credit report, but insurance companies, landlords, potential employers may also look at your credit ratings to make financial decisions. Unless you apply for a loan, most companies do a “soft inquiry” that does not affect your score. Your own requests are also considered a “soft” pull and will not hurt it. If anything, checking your report is a sign of responsible credit management, though you don't get points for doing it. When reviewing a credit application, however, a loan officer makes a “hard inquiry” that will lower your score by a few points since the application suggests that you will be adding debt. So, you should always think twice about applying for a new line of credit if your credit score is less than savory.
Closing credit accounts will improve my score.
Last, but certainly not least, we reach one of the biggest misconceptions that consumers have about credit scores: closing credit accounts will improve your score. Closing your credit cards will actually have the opposite effect and will lower your score. Why? Because it decreases the amount of credit available to you in relation to the balances you owe. The higher this ratio is, the lower your rating will be. The exact terminology is known as “credit utilization.” Even if you do not use your credit cards, the account history remains on your report. Together, good payment records and the length of time accounts have been opened contribute to a large percentage of your credit score. Leaving those accounts open improves your rating over a period of time. So, keep it open and make the banks happy!
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