You need a robust credit score to reach financial milestones like buying a home or a car. There are many myths that surround what affects your credit score and what does not! A deep study on how credit scores are impacted will help dispel some of these myths.
1. Myth: Credit Scores Is Hurt If You Check It
TransUnion, Experian, AnnualCreditReport.com, and other agencies provide a free credit report every year. Checking your credit score periodically is not likely to cause it to drop. The situation arises when you have a ‘hard inquiry’. If you have applied for a loan, mortgage or a new credit card, lenders are liable to check your credit score. You are required to give them permission to do so. This may cause a temporary blip in your credit score. Do the smart thing and do not apply multiple times for a loan, especially if you do not need it.
2. Myth: Limited Credit History May Disqualify Your Loan Application
While it is true that it is hard to build a positive credit history, having limited credit history will not disqualify you from availing a loan or a credit card. After all, you do start somewhere! It is, however, the truth that consistent and healthy credit history will make getting credit easier.
You can still apply for a Federal Student Loan with little or no credit history. It does not require a credit check or a co-signer. You can also apply for a credit card with a low credit limit with no credit history at all. Secure loans are also readily available from most lenders. You can apply for a credit card against security or even a fixed deposit. The value of the asset is the credit limit. This can act as a good way to build your credit history. Ensure that the card is evaluated by the major credit agencies to enable you to showcase responsible credit usage and prompt payment.
3. Myth: Your Income And Education Affects Your Credit Scores
There is no evidence that your income or education affects your creditworthiness. Your job, college, or social status does not have any impact on the information that credit agencies gather about you. Only previous lenders and their data affect your credit score, not your socio-economic status.
4. Myth: Bankruptcy Helps You Become Debt Free
Yes, it’s true! Bankruptcy does not absolve you of debt. There are many types of bankruptcies. The most common ones are Chapter 13 and Chapter 7.
Chapter 7 is also called liquidation bankruptcy. You avail of this process when you are unable to pay back some portion or all of your debt and have limited income and assets. The bankruptcy court mandates that all your assets are sold and the proceeds are allocated towards repayment of your debts. Some debts are reallocated, some paid off and some are discharged. It is a tedious process and may take some months.
Chapter 13 bankruptcy allows you to keep assets like your home and car. The bankruptcy court allows you to restructure your debt and pay them off. Some debts are also discharged in the process. This form of bankruptcy can be availed if you have sizeable assets and steady income flow.
Bankruptcy should ideally be your last resort as the credit score is impacted for seven years in the case of Chapter 7 and ten years in the case of a Chapter 13 bankruptcy.
5. Myth: Closing A Loan Makes Credit Scores Robust
Credit agencies study your credit utilization, so an unused credit card is a good way to keep it low. If you use up to 30% of the credit limit you are in a healthy space. When you give up a credit card your credit limit decreases and may affect your credit scores adversely. Older credit cards also help in increasing the age of your credit history and have a positive impact on your credit score.
Factors That Impact Credit Score
You can build a robust credit scores by paying credit card bills on time and in full. Low credit usage also builds your credit score. Responsible spending is a large contributor to a high score. Some things that affect your credit score are:
- Personal Loans
- Student loans -both private and federal
- Mortgage payments
- Auto Loans
- Credit card usage
Some agencies also allow the addition of Utility and Rental bill payments to reflect on your credit score. Start building your credit history early to reach financial goals with a strong credit score.