People love to say it's important to keep an eye on your credit score, but why is that? That’s because your credit score functions like a passport to the world. It’s a historical record of your loan and repayment history making it easier for lenders and other industries to judge the likelihood of you paying them back. When applying for a cell phone plan, car payment, credit card, or a host of other things, your credit score is usually immediately checked by the vendor.
Credit scores have been surrounded by myths, some even quietly sabotaging the financial goals of the people who believe in them. Let’s take a look at some of the more common ones.
- “Checking your credit score lowers it.”
This is actually false. Pulling your own credit score has no impact on it. In fact, keeping a close eye on it can help you spot errors or fraud early on! What does affect your score is when a company or financial institution checks it when you apply for something like a loan or a new cell phone plan.
- “Carrying a balance improves your score.”
Another incorrect assumption is that carrying a balance is a good thing. Carrying a balance means you are paying interest. The most important thing you can do with your balance is pay it back on time (or as soon as possible).
- “Closing old accounts boosts your score.”
Sometimes, having too many sources of credit negatively affects your overall financial health, but if you are someone who doesn’t use it, it can be a benefit. Lenders love to see long-term discipline, and with the right approach, untouched available credit can help your overall score if it has sat dormant long enough.
- “You need to be debt-free to have good credit.”
Carrying debt does not disqualify you from having a decent credit score – you need to interact with credit to have a score in the first place. What’s more important is how you treat your debt. Do you pay it back on time? Are you drowning in monthly payments?
- “One late payment isn’t a big deal.”
Unfortunately, even a single missed payment can stay on your report for years. This is why it’s so important to pay back your credit as soon as possible. Your credit score is key to some of the bigger things in life, and if you treat it with respect, it will help you along the way!