Credit score myths and truths
11 AUGUST 2023
There are a few myths surrounding credit scores that need to be debunked and some facts that need to be explained. Stay in the know by educating yourself about all there is to know about credit scores.
Myths about credit scores
1. Your income or savings impacts your credit score
More money in the bank doesn’t mean a higher credit score. Your income is not used to calculate your credit score, but rather what you do with your income. A higher income in your bank account will allow you to keep a lower debt-to-income ratio, and saving will help you build up an emergency fund.
2. Applying for a loan does not affect your credit score
When you apply for a loan, the lender does a hard enquiry on your credit report to assess your risk. This enquiry affects your credit score and if you have too many in a row, lenders might see this as “credit shopping” which has a negative impact.
3. Checking your credit report can lower your credit score
This is not true as you can check your credit report whenever you need to, and for free once a year. Monitoring your credit report is a good way to keep an eye on how you are progressing and when you need to raise your credit score.
4. Your credit score joins with your spouse’s in marriage
Credit scores do not merge when you get married. The only time both your credit scores matter is when you apply for a joint loan. Any missed payments or defaults are then reflected on both your credit scores.
5. Having no debt gives a good credit score
To have a good credit score you need to be able to show that you make payments on time through a positive payment history. This means that you need to have some mix of credit accounts or loans to build a good credit score. Learn why being debt-free can be a burden and why having no debt is not always good.
Facts about credit scores
1. Not all debt is bad
As stated in the point above, sometimes having debt is good. Good debt is debt that shows that you pay on time and can afford to manage a loan. It builds your credit score and gives you a better chance to apply for competitive interest rates.
2. A bad credit score can be remedied quickly
This is somewhat true, depending on the action you take to solve a bad credit score. For example, removing certain negative information from your credit report might take some time to go through the process. Whereas making payments on time or paying more than the minimum amount might show results faster.
3. More debt means a bad credit score
This is true as data from Experian shows that people with a lower credit score, meaning a good credit score, have the least amount of debt.
4. You can access your own credit report
Yes, you can access your credit report whenever you need to. You can access it for free once a year, otherwise, there is a small fee.
5. Credit bureaus don’t decide who gets credit or not
A credit bureau is an entity that records your payment behaviour to calculate your credit score. This means that they do not determine who is accepted for credit or not. This decision is made by the lender or the credit provider, based on the credit score calculated by the credit bureaus.
Improve your credit score with these tips
- Keep your credit utilisation low, by paying off your balances more than once a month, requesting a higher credit limit and avoid closing your credit cards.
- Dispute mistakes on your credit report. If there is adverse negative information that you can dispute get in touch with your credit bureau with the documents needed to do so.
- Look out for fraud on your credit report so that you can catch it in time before you have to deal with the consequences.
- Actively monitor your score so you know when you need to raise it.
- Plan ahead for when you need credit so that you are prepared when you find yourself needing to take out a loan.
- Build your credit score over time by using a credit card responsibly and never missing a payment.