Having a good credit score has many different benefits. Lenders use it to determine how likely an individual is to repay a loan, so if you have a good score to your name, you’re more likely to be accepted for a wide range of financial products. This includes mortgages, personal loans, overdrafts and other forms of finance.
According to recent data, many Brits consider financial pressures to be a big worry. This is why understanding things like credit scores is so important for your financial autonomy, as it will enable you to make informed decisions, such as choosing the right credit card for you. However, there’s a lot of misinformation out there surrounding credit scores, which has the potential to confuse people.
Myth: Checking your credit score lowers it
Some people think that checking their score regularly will harm it. However, this isn’t true. There tends to be two stages to checking your eligibility for credit, referred to as ‘soft’ and ‘hard’ inquiries. When you check your own score, this is classed as a ‘soft’ inquiry. This means there’s no negative impact on your score. Other examples of soft inquiries include when a landlord runs a check or when a lender needs to preapprove a candidate for a student loan, for instance.
A hard inquiry, meanwhile, may occur when a company carries out a complete search of your credit report when you apply for a loan or mortgage, for example, and can temporarily lower your credit score. A simple check of your own credit score, however, doesn’t qualify as a hard inquiry and therefore won’t affect your eligibility for credit.
Myth: Closing old accounts improves your credit score
Closing old or unused accounts won’t directly improve your score. Your bank information isn’t typically featured on your credit report as it isn’t technically classed as credit. However, it could be altered if you close a bank account while overdrawn.
On the flip side, the age of your credit accounts can affect your overall score. So can your utilisation ratio. Keeping an old credit card open can positively impact your credit score by contributing to the length of your history.
Those with good credit scores generally have accounts that are reasonably old and where the account holder is only drawing down some of the available credit.
Myth: You only have one credit score
It’s a common misconception that we each have a single score. Instead, it can vary depending on the credit reference agency. This is because each agency will have different information to base their scores on, plus their scoring criteria will vary slightly.
Your score tends to change over time too, as it reflects the various changes that occur during your life. This is why it’s so important to make timely payments, as these details won’t be missed by those responsible for your score. These events will have a clear spot in your history.
Myth: Income directly affects your credit score
While many believe that your income can impact your score, this isn’t true. This isn’t a factor that’s assessed by credit reference agencies, so there’s no need to worry if you’re on a slightly lower income.
Instead, the aim is to establish whether you have a good history when it comes to managing money. Timely payments are a huge part of this, as well as considered borrowing with loans that you can realistically pay off. Showcasing regular payments through direct debits is a good example of this. Other aspects include being registered to vote and ensuring your credit report doesn’t have any mistakes or inconsistencies.
