NEW YORK, March 29, 2023 (Newswire.com) - Credello: Having a good credit score is an essential tool in any financial arsenal, but studies show time and time again how little the public truly understands about how credit scores work. A recent study found that nearly 50% of those surveyed assumed that carrying a balance on a credit card is vital for maintaining good credit.
Unfortunately for them, the opposite is true: maintaining very low or $0 balances on credit cards ensures you'll have access to the best offers possible with competitive interest rates. On the other hand, high balances show that you may be unable to handle credit responsibly, making you a less desirable candidate for new cards or loans.
That's not the only myth that's affecting your credit score. Here are a few other popular ones we need to debunk.
Myth 1: Applying for credit cards hurts your score
Truth: This isn't totally a myth, but it is misinterpreted so much that it might as well be considered one. Applying for new credit is known as a "hard inquiry" or "hard pull" on your credit report, and having too many "pulls" within the span of three years can make lenders think you're desperate for money. Typically the highest credit scores have 0 - 2 inquiries on their report.
While hard inquiries account for 10% of your total score, their ability to lower your score depends on whether or not you'll be approved. Getting rejected for a credit card affects your credit score negatively but won't do much damage if your other metrics are good.
However, getting approved for new credit will most likely cancel out the damage done by a new inquiry because your amount of available credit will go up, lowering your credit utilization. Since your credit utilization accounts for 30% of your total score, this negates the 10% affected by the hard pull.
Myth 2: Paying a loan off early hurts your credit score
Truth: This is another that started off as technically accurate but has been misinterpreted so much that the way the general public understands it is a myth. Installment loans, like mortgages and car loans, are calculated in your credit score as part of your credit utilization but are sort of their own category (they don't matter quite as much as the amount of revolving credit you have vs. the balances you carry).
Where they do matter is your on-time payments. The number of on-time payments you make is the highest-ranking factor of your credit report, accounting for 35% of your overall score. So if you're late on your loan payments, your score will be negatively affected. If you keep things up-to-date, you shouldn't have any negative effects.
Now if you're considering paying off a car early to improve your credit or consolidating personal loans, you might be worried that it will affect your utilization, dropping your score. Typically, this isn't the case (which is why we say loans are their own utilization category), but it may affect another aspect of your score: your history.
Your credit history is the average age of open accounts you have and is 15% of your overall score. If you pay a loan off early, the account is considered closed and will no longer be factored into your credit history. Again, this is only 15% of your total score, so if your other metrics are strong, you shouldn't see a significant drop in your score. Plus, paying a loan off early will reduce the overall interest you pay, saving you money.
The bottom line
Your credit score is a critical factor for your financial foundation, so you need to understand how it's created and what truly affects your number. Do your research to find out which myths you think are helping your credit but doing the opposite.
Credello is a financial tech company offering a personal finance tool that simplifies financial decisions through personalized, on-demand recommendations — so users can borrow, save, or invest with confidence. Credello believes that finding the right financial product should be as easy and interactive as online shopping, and we are on a mission to make that possible. For more information, please visit https://www.credello.com.Contact Information:
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Original Source: Credello: Nearly 50% of People Think Carrying a Credit Card Balance Helps Your Score
Lifestyle - JISIP NEWS originally published at Lifestyle - JISIP NEWS