If you are looking at improving your credit score, you’re probably researching your credit history and trying to understand what impacts your credit. Many of the myths you hear about credit score factors involve things that don’t directly impact your credit score, such as checking your credit. Let’s take a look at some of the common myths about credit scoring and reporting.
Checking your credit score hurts it
There are two types of credit checks, “hard checks” and “soft checks.” Soft credit inquiries happen when you check your credit score, your current credit card company checks your score to see if you qualify for new offers, or a potential employer does a credit check. Hard credit checks occur when a lender checks your credit to see if you qualify for a loan. These can drop your credit score by five points to ten points, which is a small percentage for most people. Checking your credit score will not hurt your credit and will help educate you about your overall financial health.
Closing out a credit card or personal line of credit will improve your credit score
Paying off a credit card feels like a victory and will help improve your credit score. However, you should strongly consider closing out a credit card or line of credit. If you decide to close out a credit card, a couple of things could potentially happen:
- You are ultimately reducing your available credit.
- Your credit utilization ratio will change because the available credit is no longer there.
- Closing out your oldest credit card can shorten your overall credit history.
If you anticipate needing your credit card in the future, keep it open. If you have a credit card with a higher interest rate, consider closing it out if a better credit card offer comes along. Always try to pay off credit cards quickly so that you can reduce your debt to income ratio.
Your income affects your credit score directly
When a lender goes to review your credit history, one of the inputs that comes into play is income. However, income does not directly affect your credit score. Your credit score is based on factors such as payment history, credit utilization, length of credit history, and types of credit used. However, your income can indirectly impact your credit score by influencing your ability to make timely payments on your debts. If your income increases, your ability to pay off debt and better utilize your credit exists, which can help you access new lines of credit in the future.
Carrying a balance helps your credit score
Carrying a balance can help your credit score, only if your debt to income ratio is at a certain threshold. For most lenders, a 35% debt to income ratio will indicate that you are managing your financial life responsibly. If you are applying for a mortgage, many lenders will expect to see a DTI ratio that is 28% or less. If you are carrying a credit balance, try to keep it at about 35% of your income to show that you are paying off your debt and managing your finances successfully.
Settling a debt will help improve your credit score
Many people who get into the mode of settling a debt with a creditor believe that this tactic will drastically increase their credit score. The truth of the matter is that a settlement will typically stay on your credit report for as long as seven years from the delinquency date. If you are settling a debt, your score has probably taken a little bit of a ding from missed payments in the past.
Consider working with Tony’s Credit Repair
If you are looking to know more about your credit history and improve your overall financial affairs, consider working with Tony’s Credit Repair. You can understand what factors go into your overall credit score and get help coming up with a game plan to get on the road to financial success.