The Truth About Credit Scores

You will be faced with many tests in your life but there is only one score that concerns most consumers. The magical three digit number which can make or break your financial future is commonly known as your credit score. There are many factors that go into calculating you credit score and many myths that abound sometimes causing confusion among consumers. Here we will help you get a better understanding of your credit score and how it affects your life.

• Having money does not equal having a great credit score. Many people assume that only people with debt or financial troubles have to worry about their credit score. While those people certainly have a harder time meeting the criteria needed to maintain a high score, the amount of money you have has nothing to do with your score. A few things that go into determining your score include: the amount of debt you have in relation to available credit (debt to credit ratio), whether or not you make timely payments each month and the amount of credit history you have available. The main purpose of your score is for lenders to gauge your credit worthiness, not your net worth.
• If you are not borrowing money, your credit score is irrelevant. While it is true that your credit score will pay an important factor in your ability to obtain credit and your interest rate if you do so, there are other entities that view your credit report beyond lenders. Potential employers, landlords and insurance companies can view your credit score and use that number to determine if doing business with you would be a risk. This is one of the reasons that building credit and having a good credit score are so important. You may not be in the market for credit cards, mortgages or a new car, however you will likely find yourself shopping for insurance, looking for a job or renting an apartment at some point in time.
• Closing old or inactive accounts will help your score. This is a commonly believed misconception that can lead to actions that could potentially lower your score. If you have unused accounts or credit cards with little activity it is important to determine how much weight those accounts have on your score. If the accounts in question are long standing accounts that establish a long credit history you will undoubtedly harm your score by closing the account. Roughly 30% of your credit score is determined by your debt-to-credit ration. When you close an inactive account you lower the available credit which increases this ratio which can again lower your score.
• Viewing your credit report will lower your score. You are entitled to view your credit report for free one time per year from each of the three reporting agencies. By all means, you should be taking advantage of this opportunity to check for inaccuracies and view the information that others are seeing. While it is true that many pulls on your credit report can lower your score, that is only if you are applying for credit. When you view your report there is no negative consequence on your score.

These are just a few of the common misconceptions people still have about their credit score. It is important to point out that having a good score is without a doubt beneficial to your financial future but not the only thing consumers should focus on. Saving money for the future and eliminating debt should be top priorities to truly set yourself up for financial security.