Contrary to popular belief, chewing gum wont stay in your stomach for seven years, cracking your knuckles doesn’t cause arthritis and toilets don’t flush in the opposite direction in Australia. Too many myths are mistaken as truths nowadays, and the same applies to the finance and credit world. Let’s take a look at some common credit score myths.
Credit myth #1: making a lot of money will help your credit score and loan qualification
We get it, hot shot, you make a lot of money. But the truth is, unless you can prove to me that you’re smart with your money, I’m not lending you a penny. Or at least that’s the mentality lenders have. People think that their income guarantees credit, and that’s actually quite far from the truth.
Salaries are unrelated to your credit score. Your credit score is carefully calculated by different factors including your total debt and your payment habits. It’s no use to anybody that you make a lot of money if you don’t pay your bills. That’s not to say that having good income doesn’t help, of course. The more money you make the greater the maximum loan you can qualify for, but it’s not the sole dictator of your approval.
Credit myth #2: all credit reports are the same
If you pull your credit score from Equifax, then pull again from TransUnion, you might notice a difference. Possibly a big difference. The reason for this is that different financial companies report to different credit institutions, and because of this discrepancy in reporting your credit reports may vary.
Credit myth #3: not making late payments results in a great credit score
There’s a reason why your payment history only accounts for about a third of your total credit score, so don’t make the mistake of thinking that because you make all of your minimum payments on time your credit score will be a success.
And yes, there’s an explanation for this! If you manage to make all of your minimum payments on time but have taken on a lot of debt your creditors see you as a ticking time bomb. You are one big expense away from derailing off your so far spotless financial track record. That’s why it’s important to be smart about how much debt you take on.
Credit myth #4: paying off or settling outstanding debt payments removes them from your credit reports
Your payment history is your payment history and unfortunately you can’t change it. If you default on your debt or don’t contribute any payment towards it, it will be noted and unfortunately settling your accounts wont help. Only erroneous reports are removed from your credit reports.
Credit myth #5: paying cash helps your credit rating
People often make the mistake of thinking that not using credit shows that they are responsible with their money. And while that may be the case, it’s not necessarily true.
First of all, knowing that your payment history contributes to a significant chunk of your credit report directly tells you that you need credit to form a credit score.
Second, paying for everything in cash can imply shady practices – especially if you have made large purchases (e.g. car, house) using only cash. If you aren’t dealing with credit at all, you might be rich, you might be frugal, or you might have a lot of undeclared income. But remember, to develop your credit score you’ll need a credit history.
