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Fact or Myth: Credit Edition

When it comes to credit, there is a lot to know. Credit can be complicated and, as consumers, it is important that we understand how credit works. Although a lot of what we read and hear on this topic may be true, there are a lot of misconceptions as well. Let’s address some of the common myths about credit and how it works.

The good and the bad

We all know that borrowers have a credit score. Ever prepared to apply for a new loan and thought to yourself, “I don’t have a good score, so I probably will not get approved?” Well, here is some good news: credit scores are neither good nor bad. Your credit score solely determines your risk factor. It is true that the higher your score is, the lower the amount of risk it may be to lend to you. However, the score doesn’t determine whether you are approved or not. Your entire credit report is accessed when applying for any type of new credit. The better you manage your debt, the higher your score will typically rise. A score is just a number, but the work behind it is what counts.

Another misconception is that income plays a factor in your score. How much you make does not determine how your score grows or shrinks. Your income is only a factor when applying for new loans. This is to determine whether or not you can afford the new credit payments. Income, race, religion, sex, and material status are not a part of how your score is determined. All of these items are left off of your credit report, as they do not play a part in your risk factor.

Couple scores

It is often assumed that credit scores are combined when married. However, your score is not determined by your relationship status. Credit scores are individually assessed numbers. Your credit score can only be affected by others when you have credit accounts with co-borrowers or cosigners. This means a second person is also responsible for making sure that a specific obligation is paid back as promised. The more shared credit accounts you have with your spouse, the more this will impact each of your scores, but each will remain individually calculated.

Cancelling and closing

Closing credit accounts when no longer needed or used may seem like the way to improve your score. This is not always true. Of course it is always a good idea to pay off your debt in a timely manner. It feels good not to have that extra monthly financial responsibility. However, it may not be a good idea to close accounts right away. For example, credit cards that do not have a balance owed still serve purpose, even when not being used. If you have established positive payment history with these accounts, it can have a positive impact on your credit report. Open availability is a good thing when factoring into your credit score. Also, accounts with a long history help to establish payment history and strong relationships. Closing these types of accounts may actually hurt your score. In this case it may be a better option to keep those accounts open, as long as you aren’t being charged fees to keep them open.

Did you know that items on your credit report can remain there for up to seven years? Even your closed accounts still matter. The way you manage your credit accounts will make an impact on how your credit score is calculated for years to come. You cannot magically erase negative history on your report, which is why it is important to manage your payments to the best of your ability. Mistakes happen, and that is ok, but be sure to make corrections to how you manage your financial obligations whenever possible so that you do not have repeated negative history.

Fact Check

The more you know, the more successful you will be at maintaining a decent credit score and managing your debt. Knowing what impacts your credit report is important. It is also important that you do your research so that you are equipped with the correct knowledge to make informed, strategic, and confident credit decisions.