3 myths that could weigh on your creditworthiness


Whatever your credit score, it could probably be higher.

Many people take steps to improve their credit score – but if they get it wrong and are misled by myths, they could actually damage their scores.

Here are three myths that could weigh on your creditworthiness – including some misconceptions about creditworthiness that could also harm you:

Myth # 1: Closing credit card accounts increases your score boost

Many people assume that when they close a number of credit card accounts, their creditworthiness increases. After all, having fewer cards means fewer potential debts, doesn’t it? Well not exactly. Take a look at the components that determine your FICO score, which is the most commonly used:

  • Payment history – 35%
  • Loan Utilization (Amount Due vs. Limit) – 30%
  • Loan History Length – 15%
  • New credit -10%
  • Other factors like your credit mix – 10%

Closing credit card accounts can actually affect your score. That’s because your score takes into account your “credit utilization” and compares how much you borrowed against how much you could borrow (i.e. all of your different credit limits). If you close an account, you will lose that credit limit and your credit utilization rate will increase.

For example, if you owe $ 4,000 and your combined credit limit is $ 20,000, your loan utilization rate is $ 4,000 divided by $ 20,000, or 20%. If you close an account and your total credit limit drops to $ 12,000, your ratio goes up to 33%.

Note that if you ever want or need to close an account, it is best to close newer accounts as older accounts are more valuable and have a long credit history. Or take out those with low credit limits. However, you rarely need to close accounts. Just block a few cards and stop using them. Or maybe close an account every six months.

Myth # 2: Eliminating credit cards can improve your credit score

Another seemingly reasonable myth is that if you don’t use credit, you will have good credit. That’s not the case because a credit score reflects how good your credit risk is and it is based on your borrowing – your borrowing and repayment history. If you haven’t done much or none of these – perhaps because you don’t own or use credit cards and / or haven’t taken out a car loan or mortgage – then you are going to be a mystery to prospective lenders. When you want to borrow money, they can’t offer you the best interest rates because they don’t know if you are a good risk or a bad risk.

Ideally, you want to handle credit responsibly. You should pay invoices as punctually and in full as possible.

Myth # 3: Only late payments of certain debts will hurt your score

The only way to assume that your creditworthiness will be compromised is late making mortgage payments, paying credit card bills, or paying off other debts such as car loans. Not true. Almost any creditor can report you to credit bureaus – landlords can report you, as well as owners of storage space you have rented and many others to whom you owe money. Even a late or unpaid library fine can hurt your score, as can overdrafting a line of credit with your bank to protect you from overdraft fees.

Here are a few more credit misconceptions that can hurt you:

Misconception # 1: Assuming you have good credit

Never assume that your credit is good. Sure, you may be the most responsible borrower who pays bills on time and in full – but there could be an error in your credit report that results in a lower than expected score. It is wise to check your credit report regularly, especially before you need to borrow money. Give yourself time to increase your credit score if you have to.

You are entitled to a free copy of our credit report annually from any of the top three credit reporting agencies – visit AnnualCreditReport.com to order yours – then check for errors and fix any you find.

Misconception # 2: Thinking that every time your score is looked up, it will be reduced

There is indeed some truth in that. This is because there are two different types of loan inquiries – a “hard pull” and a “soft pull”. One difficult query involves having a lender review your credit report as you apply for a loan – you might want a car loan, mortgage, or new credit card. This will require your approval, and this request will likely take a small amount of your creditworthiness down – around five to 20 points. Note that if you shop at a number of lenders and get all of your credit reports within a few weeks, it generally counts as just one query.

However, a gentle query doesn’t affect your creditworthiness – which is good because these queries are usually made without your even realizing it. For example, if you receive credit card offers in the mail, the card issuer has likely checked your credit report to see if they want you as a customer. Looking up your own credit report is another gentle query that won’t hurt your score.

Misconception # 3: Thinking that your low credit score means no credit

You can still borrow money if you have a rather low credit rating. But you are offered much steeper interest rates than you would get with a healthy score. Take a look at the table below, which shows you some current sample rates from the folks at FICO that might be offered to borrowers with different credit scores – and what kind of difference the rate makes on your payments. If you borrow $ 200,000 through a 30-year fixed-rate mortgage and have a top FICO score in the 760-850 range, you might get an interest rate of 3.568% on a monthly payment of $ 906 and total interest paid over that 30 years from $ 126,051. However, if your score is 630, your rate would be very different at 5.157% with a monthly payment of $ 1,093 and a total interest of $ 193,449. That’s $ 185 more per month ($ 2,220 per year) and a whopping $ 67,398 more in interest.

760-850

3.568%

$ 906

$ 126,051

700-759

3.79%

$ 931

$ 135,080

680-699

3.967%

$ 951

$ 142,371

660-679

4.181%

$ 976

$ 151,294

640-659

4.611%

$ 1,027

$ 169,577

620-639

5.157%

$ 1,093

$ 193,449

Related links:

• Motley Fool issues rare triple buy warning

• This stock could be like buying Amazon in 1997

• 7 out of 8 people are ignorant of this trillion dollar market

It is worth trying to keep your credit score as high as possible as you go through your financial life, as having a high score can save you a lot of money over many years.

CNNMoney (New York) First published on Aug 29, 2017 at 11:51 a.m. ET

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