3 Credit Score Myths

Throughout life everybody comes to a time when they need extra funding. Whether it's purchasing a new home, car, business, or anything else your heart desires, creditors will look at your credit history and score.

Your credit score significantly impacts the amount of money you can borrow and the amount of interest you will be charged on the money. Unfortunately, there are some myths floating around about how to establish a good credit score. We're going to take a look at what these are below and share with you the truth.

Myth #1 – Closing Old Accounts Will Improve Your Score

Just because you have some old inactive accounts open, doesn't mean you should get rid of them. In fact, one of the biggest factors of a person's credit is their history. If you close out these old established accounts it can actually decrease your credit score because your current accounts show a much shorter credit history.

Lenders tend to trust individuals that have a long history with their existing creditors. If all your open accounts only consist of a few months or years of an established relationship, lenders may mark you as more of a potential risk. That could result in a higher interest rate or denial of a loan application.

Myth #2 – The Amount Of Credit Card Debt You Have Doesn't Matter As Long As You Pay On Time

Paying your bills on time is a necessity to keeping a good credit score. However, if you carry high balances on your existing credit cards it can negatively affect your score. Credit utilization, the amount of debt you have compared to the total amount of credit the card allows, is a major factor of your credit score.

In fact, your credit utilization rate is the second largest factor in formulating your credit score. This falls just behind your credit history. It's a good idea to keep your credit card utilization low. But, what's low?

The debate over the perfect credit card utilization rate has been ongoing. The best utilization rate to hold is 0 percent. This means that you don't have any credit out. This helps to build your credit history at times that you don't necessarily need to use the credit card.

If you do have to use your credit card the recommended utilization rate is less than 30 percent. For example, if you have a credit card with a $1,000 credit limit, you don't want to put any more than $300 on the credit card. Anything over $300 would be over the 30 percent utilization rate.

Myth #3 – Cosigning A Loan Doesn't Affect Your Credit

Anytime you sign on the dotted line of a loan agreement, it's going to affect your credit score. Regardless of if the loan is for someone else, you're still responsible for the loan. If the person you cosigned the loan for pays their bills on time, this will reflect positively on your credit score. However, if they are late or default on the loan this will negatively affect your credit score.

It's important to realize that when you co-sign on a loan for somebody else it still counts as credit that you have out. If you are thinking of getting a loan for a big expense, such as a car or mortgage, it may not be such a good idea to co-sign a loan for somebody else as it could alter your availability of taking out more credit.

Hopefully, you now understand what truly makes up a good credit score. It's a good idea to confirm what you hear people say with actual sources to ensure the information is true. You can learn more about financial freedom, reducing debt, and how to use credit to your advantage through Steve Down’s financial management program, Financially Fit.