A credit score indicates your credit worthiness ranging from 300 to 900. This score is generated based on your payment history, length of credit, new credit, etc. Since personal loans are offered without collateral, lenders measure their risk of lending you the money based on your credit score, and they expect you to have a minimum score of above 750 to be eligible for loans. Hence, credit scores play a crucial role in taking loans.
Though credit scores are essential in many ways, there are many myths that you might not be aware of. Therefore, in this article, we will bust all the myths about credit scores that might harm you financially.
Benefits of Having a Good Credit Score
- Low-interest rates: You can quickly get personal loans at comparatively lower interest rates.
- Eligibility for loans: You automatically become eligible to apply for any loans.
- Credit Cards: You can get good deals and competitive offers on your credit cards.
- Higher loan amount: You can also apply for a higher loan as you are considered a low-risk borrower.
- Quick approval of loan: Lenders will readily offer you pre-approved loans if you are an existing customer with a high score. They will also approve your loan immediately without taking a long time to verify.
5 Credit Score Myths That You Must Know
Checking Your Credit Report Lowers Your Score
It is the most common myth about credit scores. Checking your credit report will not harm your score because it is considered a soft inquiry. But if lenders check your credit score to determine your creditworthiness, it generates a hard inquiry in your credit report, which will affect your score negatively.
Having A Outstanding Balance On Credit Increases Your Credit Score
On the contrary, your credit score will reduce if you have unpaid balances on your credit card. Moreover, you will have to repay your credit at higher rates to cover the outstanding dues. Hence, ensure you pay your dues on time without keeping any balance.
Credit Score Increases With Rising Income.
Your income has no direct impact on your credit score. However, a credit score depends on other factors such as payment history, length of the credit, new credit, credit utilization, credit mix, etc.
A Poor Credit Score Last Forever
If you get a bad credit score now, it does not mean you will have a bad score forever. You can quickly improve your score by making timely payments, repaying all your outstanding dues on time, and maintaining your credit utilization under 30%.
Using Debit Card Boosts Credit Score
A debit card is used only to access your savings account and does not include an account for credit. Hence, your debit score will not affect your credit score. However, your credit card has a direct impact on your credit score.
How to Improve Your Credit Score to 750?
Check Your Credit Report
Check your credit report and review it annually to identify any potential errors and suspicious activity. If you find any such activity, report it to the major credit bureaus such as Experian, Equifax, and TransUnion and get it rectified immediately. Doing so will help in increasing your credit score.
Make Timely Payments
Payment history accounts for most of the FICO score model (30%). Therefore, make payments within the given time to improve your score significantly. Also, you can set reminders to make payments on time without defaulting.
Keep your Credit Utilization to less than 30%
Credit Utilization Ratio (CUR) represents your credit usage to your credit limit. Likewise, it is necessary to maintain your credit utilization to less than 30% to improve your score.
Limit your Hard Inquiries
Avoid applying for loans from multiple lenders in a short period. The reason is that each time you apply for a loan, the lender will conduct a credit check to determine your credit score. As a result, a hard inquiry will be initiated, negatively affecting your credit score.
Keep Your Old Accounts Open
Do not close your old accounts even if it’s not in use. The reason is that maintaining your old accounts increases the length of the credit history, which will, in turn, increase the credit score.
Credit Scores are an essential part of your financial health. A good score brings many benefits when you are planning to apply for a loan online. However, you must also regularly check your score using Buddy Score to keep track of your credit history. Last but not least, do not fall for the myths about the credit score, as they can harm your financial health.