Nine Bad Credit Myths, Busted
One of the downsides of people being unwilling to talk openly about money and their personal finances is that lots of myths and misconceptions spring up. Once these ideas about credit and finance take hold, they’re hard to get rid of, simply because people don’t talk to each other about money as much as they should do.
One big myth that needs to be exploded before any other is that credit in itself is something bad, scary, unpredictable and just not to be trusted. Credit is merely a tool – if you use it wisely, you’ll benefit; if you’re silly with it, you’ll get your fingers burned. Once you realise this, you’re in a great position to disabuse yourself of these other major myths about bad credit. There’s nine in total here, so eyes down…
All credit is bad credit
A debt is a debt is a debt. If you owe money to a person, a bank or another lending institution, you’re in debt and that’s a bad place to be, right? No. Not all debt is bad. If you went on a crazy spending spree a few years ago and you’ve missed a few repayments along the way since, then it’s not so rosy. If, on the other hand, you got one of the best home loans on the market and you’re paying down that mortgage every month, you’re improving your credit score and keeping a roof over your head!
Checking your credit score will damage it
It's true that every time you or anyone else checks your credit score that a note, or inquiry, is placed on the file. Everyone thinks that these inquiries are automatically bad, but this isn’t the case. If an inquiry is related to an application for credit, then your score is likely to be affected, especially if it was turned down, because you’re increasing your debt. If you check your credit score every few months to make sure all’s well, however, your score won’t be affected. As a matter of fact, checking your score at regular intervals is a sign that you’re responsible with your finances (unfortunately, you won’t get extra points for this, though…).
Closing down unused credit cards is good for your score
If you ever look at that credit card or overdraft that you never use and you wonder if relinquishing it will boost your credit rating, stop! Closing down that source of credit may actually harm your score because most scoring models don’t look at the total amount you could spend, but the amount from your total that you are spending. This produces a ratio of credit utilisation and if you reduce your total amount, you increase your utilisation ratio, which is bad news for your score. In general, anyone using more than 75% of their total available credit is deemed to be sailing a bit too close to the wind.
There’s not just one credit scoring model out there
There’s no one single scoring formula, as this wouldn’t take in all situations or suit different purposes. Having just one model wouldn’t help people to rebuild their score by being able to apply for credit cards for bad credit, or to get a business or new car loan.
Lenders have their preferred scoring formulas for different situations and each formula looks at your credit history from a different angle, putting the emphasis on different factors.
Your profession determines how much credit you can get
Your profession or job title – and so indirectly your income – doesn’t have much bearing on your credit score. Your credit score is all about your debt management and how well (or not) you use the amount of credit extended to you. If you have had a small loan and paid it off on time, your score will be better than someone who’s had a larger loan and missed a payment or two. It’s more important that you know how to use a personal loan repayment calculator and that you live within your means; how much you earn is secondary.
You’re not judged on your race, religion or disability status
In pretty much the same way as your credit report doesn’t place too much weight on your profession, it also ignores your race, sexual orientation or whether you have a disability. If you have a bad credit rating then it’s down to how you’ve managed the credit that’s been extended to you in the past. Your credit report doesn’t know or list how much you have in savings; all it “knows” is whether you’ve missed any payments in the past and how much of a risk you are to lenders.
Your bad credit doesn’t affect your spouse
If you live with someone, your individual credit report doesn’t have any effect on theirs at all. It doesn’t matter if you’re married, cohabiting or just flatmates – your rating is your rating. If you have joint accounts with someone, however, like a mortgage or a shared credit card, then your individual handling of these facilities will affect the other person.
You can’t pay someone to “sort out” your poor credit rating
Sure, there are lots of credit repair companies out there that offer help and advice on reducing your debts, but the heavy lifting is actually done by you. If the information on your credit report is accurate, there’s nothing that can be done to erase it, no matter how damning it is. It’s up to you to improve your score.
Your bad credit score isn’t a true reflection of you as a person
All your credit score does is to assess how risky it is to lend you money. You could be a great person who helps old ladies across the road, but if you can’t answer the question “What is a balance transfer?”, you never check your bank statements and you can’t resist impulse purchases, then you’re more likely to have a poor rating.
Your selfish cousin, on the other hand, who toots at the old lady because she’s struggling across the road, can tell you his various bank balances down to the dollar and he’s never missed a card payment. His credit rating is top notch. This might seem unfair, but ultimately, improving your score is in your hands.
Don’t stop helping old ladies across the road, though…