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Credit scores can be an overwhelming and stressful topic for many Americans, especially as mortgage and interest rates continue to rise.
According to the MoneyGeek, more than one in 10 Americans are considered to be credit invisible, as approximately 28 million U.S. adults have no credit history.
Without a credit score, you might find it hard to borrow the funds you need when committing to large financial purchases, such as a house or a new car, but having a low score can also affect your ability to rent or get insurance.
While establishing a strong credit score is important, the topic of credit scores, finances, and debts comes with plenty of myths, misconceptions, and confusion.
Jonathan Such of First Response Finance, a vehicle finance company, told Newsweek about the common misconceptions when it comes to credit scores.
“We understand that for many people, credit scores can be a stressful aspect of their personal finances,” Such said.
“There are many myths surrounding credit scores, and a lot of people have trouble understanding the different credit options available. Having past credit issues shouldn’t always stop you from getting the finance help you want or need.”
One of the most common misconceptions when it comes to credit scores is the impact your income might have, though Such said this isn’t something you should worry about.
“How much money you have isn’t taken into consideration by credit scoring models, and your credit reports don’t have your income on them, so your score can’t be impacted.”
He went on to say that credit scores are based only on information found in your credit report. This means if you change your income, your credit score would not change, but if your income changed and you were forced to miss a household bill payment, you would see this reflected in your credit score.
Paying off your debts to improve your credit score is another surprising myth that Such wants to dispel.
“Even though repaying debts is a good move, making repayments on existing debts is often the best way to improve bad credit.”
If you are aiming to improve your credit score, you needn’t worry about paying off your debt in large lump sums, as paying it down consistently over a reasonable period of time is far more likely to improve your score.
In a similar vein, some might believe that closing your credit cards once you’ve paid them off will boost your score, but Such said that’s not the case.
Credit scores are based on how much debt you have access to, and are able to repay consistently, which means you might actually see your credit score drop slightly: “Your total available credit is reduced when you close an unused account, resulting in your credit utilization going up.”
Such added that the sooner you start building your credit score, the better chance you would have of getting the score you need at a later date.
“The sooner you establish credit the better! One of the big factors in your credit score is the length of your credit history. You should start worrying about your credit score sooner rather than later. The minimum age to qualify for a credit card in the majority of situations is 18.”
But, if you do find yourself with a lower than ideal credit score, Such said not to worry as this may not necessarily impact your ability to borrow money in the future.
“Having a low credit score doesn’t necessarily mean your application won’t be accepted. Service providers and lenders will also consider other factors, such as past account history and affordability. You may just be offered a more limited amount of credit or higher interest rates,” Such said.
“Trying to get your head around your credit score can be confusing, but with the help of financial experts, you can gain a better understanding and chance of being accepted for finance. It’s important to remember that credit is a tool, and what matters is how you use it!”
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