Often we listen to what other people tell us about credit and credit scores and how they work instead of finding out for ourselves. Here are 11 myths you should not fall for.
Myth 1: Debt is debt
While the amount may be the same, what the debt means in your life is the important thing. For instance, if you have R150 000 debt on your credit report because you have used your credit card or personal loans to throw a birthday party two years ago, then you’re in trouble. However, if that R150 000 is your home loan, then you are investing in your family’s wellbeing and your future.
Myth 2: Checking your credit report will hurt your score
A note, which is called an inquiry, goes on your credit report every time someone looks at your file. That’s a fact. However, an inquiry only affects your score if a credit check was done because you have applied for a loan. If you simply look at your own credit report, there is no impact on your score. So, don’t be afraid to check your credit report – it is, in fact, a healthy money habit.
Myth 3: Closing an account will improve your score
Different credit bureaus use different models to calculate credit scores. Most of these models don’t look at how much credit you have available – the important thing is how much of that credit you are using. This is called credit utilisation. When you close an account or card you don’t use, you reduce your total available credit and your credit utilisation goes up. (Of course, if that card or account could tempt you into spending, then it is better to close it.)
Myth 4: There is only one credit score
As we’ve said above, there are different credit-score models. In fact, there are more than a thousand of them in the credit marketplace! Credit providers check your credit score for different reasons and each formula looks at your credit history in a different way, resulting in a different score.
Myth 5: Credit bureaus give good and bad scores
Your credit score is not good or bad in itself; it is only a measure of risk. It is up to a credit provider to decide what your score tells them about your risk as a customer.
Myth 6: Your job influences your credit score
Your job title and income have no direct effect on your credit score. Scores are based only on the information in your credit report, and that is all about how you use credit and how well (or not) you manage your debt. However, when you apply for a loan, credit providers will certainly want to know about your income.
Myth 7: Who you are influences your credit score
Only the information on your credit report affects your credit score, and credit reports don’t include information about such things as race, gender, where you were born, religion or sexual orientation.
Myth 8: Married couples have a joint credit report
Married or single, you have your own credit report linked to your ID number. If you and your spouse have joint accounts, such as a home loan, they will appear on both your credit reports and will affect both of your scores. But your credit report is yours alone.
Myth 9: Debts that are settled disappear off your credit score
Eventually they do, but not immediately. The evidence of that debt can remain on your credit report for years. This is good news for people who pay their debts on time and in full, because the paid-off accounts show that they use credit responsibly. Most negative information can remain on your report for up to seven years.
Myth 10: Companies or agents can “fix” your credit report
No “credit repair” company can remove information from your credit report. At best, someone can help you come up with a plan to repay your debts. The only real way to improve your credit score is by paying bills on time, reducing outstanding balances and only applying for credit when you need it.
Myth 11: Your credit score measures your value as a person
Your credit score does not say if you are a good or a bad person. If your score is low, it’s because your credit history shows there is a chance that you will default on a loan. It doesn’t mean anyone thinks you’re a bad person.
(This article is based on information compiled by Experian.)