Building and maintaining good credit is essential to financial health. A good credit score can open many opportunities for you and your business from securing loans, investors and business partners. However, there are many misconceptions about what your credit score is and what impacts it. We’ve created a helpful list of credit myths and truths to keep you informed.
1. Checking your credit report decreases your credit score.
This myth is partially based in truth. When you apply for credit, your potential lender will make a “hard” inquiry into your credit report. This type of inquiry can affect your credit score, but the impact is minimal as long as you don’t submit too many credit applications in too short a period of time.
A “soft” inquiry is when you check your own credit report. This has no effect on your credit score and is actually a good strategy to make sure there are no errors on your credit report.
2. You should check your credit report at least twice a year
Depending on what actions you take (applying for credit, paying off debt etc) your credit report will change. It may also change based on an error made by someone else or if you have fallen victim to identity theft.
These changes affect your credit score and in turn affect your chances of getting a loan, so it is important to regularly check your credit report. Without checking your credit report regularly, you will not know if there are red flags to be aware of. Regular checks empower you.
3. Paying off debt removes that debt from your credit report
Your credit history is reflected in your credit report. This means all your accounts and their associated payments (on-time or late) are included. Paying off debt is a good strategy to improve your credit history, but all late payments stay on your credit report for 7-10 years. Thus, paying off your debt immediately will not remove it from your credit report. However, paying off the debt will also be recorded on your credit report which is a positive sign to your lenders that you can manage debt.
4. Your Credit Report may differ across credit bureaus
There are three major credit bureaus: Experian, Equifax and TransUnion. As they are separate entities the version of your credit report may differ. Each credit bureau report may vary in the details of their reporting and variation may occur as not all lenders actively report to all three credit bureaus.
5. Every bill you pay helps build credit.
Credit bureaus have strict requirements about who can report consumer information to them, and so many of your bills (even paid on time) will not affect your credit score. For example, payments to small companies, individuals, and local services—such as for rent or a storage unit—typically don’t show up on your credit report.
If your payment information isn’t being reported to the credit bureau then it cannot affect your credit score. If possible, be sure you are doing business with companies that do report your positive payment history to credit bureaus as this will bolster your credit score.
Keep in mind, even if companies to do not report positive payments to credit bureaus they can still report you for late payments. They may send your account to a collection agency who typically report information to the credit bureaus on accounts they acquire.
6. You should close old credit cards
MYTH & TRUTH
If you find yourselves consistently overspending and missing payments on a credit card, then you should close it to avoid getting into further debt. However, closing a credit card can actually negatively impact your credit score.
A major factor in calculating your credit score is how much you owe relative to your credit limits (credit utilisation ratio) as well as the length of your credit history. When you close accounts, some of the credit limits are removed and that could lower your score. So keeping your account open will benefit both of these factors.
Instead of closing your account, rather use it to make small monthly purchases like an online subscription, or one dinner a month. If you are determined to get rid of cards, close the newest ones first and do it slowly over time, as this deals with the length of credit extended.
Credit can be a complicated and tricky concept to wrap your head around, especially with all the misinformation out there. However, with a trusted business partner like MarisIT you can be sure you are making sound credit decisions. Find out how to improve your credit score and minimise your financial risks.