You learn how critical credit scores are to your quality of life from the moment you enter adulthood. Whether you apply for student loans, credit cards, auto loans, rent, mortgage, and in some cases, a job, your scores play a significant role, as they dictate your risk level, whether you can receive funding, how much, deposits, terms of agreement, and interest rates.
Of course, that realization encourages almost everyone to want to maintain a high credit score.
Getting and keeping an excellent credit score (800 to 850) is worth aspiring for – but being misinformed can throw you off track. Whether you listen to a friend, or take pointers from a source that’s not backed by facts, you need to be aware that there are several myths out there that cause many people to make poor decisions that negatively impact their personal finances.
Debunking The Myths
Is it possible that some untruths you’ve adopted about credit scores are keeping you from evolving financially? Below are some of the most prevalent misconceptions.
No Credit Is Better Than Bad Credit
It’s not uncommon for young adults to assume that no credit is better than bad credit. While it is true to some degree, both of these credit statuses lead to the same outcome. Lenders, credit card companies, landlords, mortgagers, and other credit-based businesses review your credit score to determine your financial responsibility and risk level. If you’ve never had a credit account, companies are making a decision blind.
At the very least, someone with bad credit has something for companies to make an informed decision with fewer risks. Ultimately, whether you have no credit or bad credit, you could get rejected, have to pay more for deposits and interest rates, or receive shorter terms.
Don’t be afraid to apply for credit accounts as it can help you establish a financial profile. As long as you manage these accounts responsibly, it will benefit your credit scores.
It Takes A Long Time To Ruin Your Score
Credit bureaus calculate your score using five general factors: payment history, credit utilization, length of credit history, credit mix (diversification), and new accounts. Your credit score drops any time there is an action on your credit report that falls into these categories.
Some actions, like missing a payment, can cause a significant decline in your scores. Believe it or not, your credit score can fluctuate from one day to the next. It’s also important to note that some negative ratings can stick with you for seven to ten years.
Be mindful of the financial moves you make, especially related to your credit history and score. Even if you have an excellent score, you should always be responsible. Pay your bills on time, don’t open more accounts than you can afford to manage, and take action to resolve account issues should you fall on hard times.
It’s Impossible To Rebuild Your Credit
When you’re looking at a poor (500-600) or very poor (499-300), getting to 800 or higher seems impossible. You may have even tried for a period to improve, but your score feels like its creeping upwards. So, why not just give up?
Ruining your credit is a lot faster than repairing it, but it’s not impossible. While everyones situation will vary, it can take several months or years to rebuild your credit. However, every month you make payments on time, pay down principal balances on large debts and limit new applications or inquiries, which is a positive move for your credit.
As long as you continue taking these steps (without generating more negative marks), eventually, the good will outweigh the bad, and your score will improve. There are financial products to make rebuilding your credit easier, like a credit builder card. It’s a debit card with adjustable limits, enabling you to avoid everything from new inquiries to late fees. Your automatic payments are reported to credit bureaus, which account for 35% of your credit score.
Underestimating the significance of your credit scores or having a false comprehension of how they work can cause many problems. If you’ve fallen victim to the above credit score myths, it’s not too late to make corrections to boost your score, save money, and enhance your overall quality of life.
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I had GREAT credit until we paid everything off and within a few months it went down about 20 points! We decided it’s important to keep it ‘excellent’ just in case we ever need to borrow again, so are back to using credit cards and paying them off monthly. Live and learn… ;o)
I’ve seen that happen to me too, Lauren.
If you ever need a quick boost to your score, opening up a new credit card can help – and the bigger the credit limit, the better. Just be sure to keep it paid off in full every month; the new card will lower your credit utilization ratio (=credit used/available credit). As that ratio drops, your credit score goes up.