There are many common misconceptions about credit scores. What do they mean? What do they consist of? Are there ways to improve a bad score? Whether credit scores are something on your mind or not, either because you are in the process of applying for loans or maybe aren’t in that part of your life yet, credit scores are something you should be aware of. Knowing how they work will help you plan accordingly to make sure you are on track to having a solid credit score.
How Income Affects Credit Scores
While income is not a factor in calculating a credit score, it can certainly impact your credit performance and therefore your credit score. Having a low income will not mean you will have a low credit score, regardless of what some people believe. However, according to Credit.com, having a low income can affect your credit score if it affects your ability to pay your bills.1
Closing Credit Cards Will Not Instantly Bring Up Your Score
You may have heard that by closing credit cards you can boost your score. Well, this is not the case. In fact, closing a bunch of credit cards in a short window of time can actually harm your score. When deciding whether to lend you additional credit or a loan, creditors want to see how you manage your current credit, which means having some active cards will help, Bankrate noted. This doesn’t mean that you can’t close any of your cards ever, but it does mean you must be careful in your approach.
On the other hand, having a bunch of open cards doesn’t look good when creditors analyze your risk. Even if you are in good standing on all of your credit cards, having a bunch of active credit accounts at one time can invite creditors to think you may be dependent on credit, which might raise some flags. Again, having several credit cards is not a problem, but trying to open a credit card at every store to get the most of a sale or to see the greatest return on miles can start a trend you don’t want to have.
Paying Off Debts Will Not Instantly Improve Your Score
When you pay off your debts your score will certainly improve, but it will not happen right away. Your credit score is a collected history of your financial activity, which means length of time matters. In fact, according to Credit Karma, negative records, which are late payments, bankruptcies or accounts of yours that were held in collections, can stay on your record for seven to 10 years2 even after you pay them off.
Don’t misunderstand, it is crucial that you pay your debts off, but it is also important to make timely monthly payments. Late payments will linger longer than you want them to. Therefore, it is important to know that paying off your debt is necessary to building your credit score, but making payments on time will help quicken this process.
According to FICO, your payment history typically accounts for 35 percent of your score.3 This is a significant number, with only 10 percent applying to new credit. Simply put, your long-term credit weighs more heavily on your score than new credit.
Your Score Will Not Drop by Checking Your Credit
Your credit is not some secret that is locked away with the credit bureaus and restricted from your view. A misconception is that checking your score will cause it to drop. This is not the case. When you want to view your report it is known as a soft inquiry, which does not count against you. However, there is such thing as a hard inquiry, which is when a creditor or lender wishes to view your records. This can happen out of concerns or validation, but it will typically bring your score down a few points.
Divorce as an Act Will Not Bring Down Your Score
While going through a divorce can be challenging and a financial burden for some, it alone will not negatively impact your credit score. That being said, there are indirect methods for which a divorce can damage your credit score.
According to Experian, many times when people get married they merge their accounts, which means poor financial behavior of one spouse can affect the other. For example, if your spouse is in charge of the finances, even though they are under both names, and makes late payments, the late payments will appear on both parties credit reports and will have a negative affect for each even after divorce.
When it comes to credit scores, the best thing you can do is be responsible with how you use your credit and to make timely bill payments.
The views expressed by the articles and sites linked in this post do not necessarily reflect the opinions and policies of Cash Central or Community Choice Financial®.
1Tayne, Leslie. (2015, Jan 13). Retrieved from: https://www.credit.com/blog/10-credit-score-myths-ive-been-told-105884/
2Bhatia, Mika. (2022, Jun 9). Retrieved from: https://www.creditkarma.com/advice/i/learn-credit-score-factors
3My Fico. Retrieved from: https://www.myfico.com/credit-education/whats-in-your-credit-score