Banks and financial institutions usually check the credit score before approving your loan application. Read on to know about few misconceptions surrounding credit score that can hurt consumers.
You must have read a lot of reports on the internet and financial magazines talking about Credit Score for a loan. So, how does a credit score help in getting you a loan? A credit score is a numerical figure that reflects an individual’s creditworthiness and ranges between 300 and 900. The best interest rates are offered to loan applicants with scores of 750 or above. Banks and financial institutions usually check the credit score before approving your loan application. An unhealthy credit score might lead to rejection of the loan application. Therefore, it’s wise to regularly check your credit report and ensure it remains robust.
Let us take a look at a few misconceptions surrounding credit score that can hurt consumers.
Checking Credit Report Will Have An Adverse Affect: Most consumers are under the illusion that checking the report will adversely affect their credit score and hence, they never take the initiative to check it. But it is a popular misconception. What consumers are not aware is that there are two types of enquiries concerning your credit score – soft and hard. When you make personal enquiries about your report, it is considered a soft one and will not hurt your score. But when you apply for a loan or credit, the officer will make hard enquiries which have the potential to hurt your score. Hence, if you have a low score, think twice before applying for credit as you might lose few points due to the hard enquiry and your application may be rejected as well.
Paying Off Collection Accounts Will Help It Get Deleted From Your Report: Customers believe paying off collection accounts or late payment will help it get removed from your credit report as you are clearing off the debt. Well, it’s a good move to improve your creditworthiness and credit score as the adverse records won’t get highlighted in your credit report. But hold on, paying off collection account does not mean it will automatically get deleted from your credit report. In fact, it will just appear as paid but will stay on your credit report for seven years since the date of first default. However, it is always advisable to pay off your debt as you reduce your liability and show your willingness to complete your financial obligations. This will eventually have a sound effect on your credit score.
Closing Credit Cards Will Help Improve Your Credit Score: This is a mistake most people do as they believe they can close credit cards to have a favourable effect on the credit score. But in reality, it will diminish your credit score for the simple reason that you will have a shorter credit report and less amount of credit available to you in comparison to your debt. If you have paid on time on your old credit cards and have a good credit history, then let it reflect on your credit report as it boosts your credit score. Leaving these Credit Cards open will help you improve your credit score in the longer run.
You Open An Account In A Joint Name To Help A Friend, And You Will Not Be Responsible For It: You might be tempted to help a friend to co-sign or open a joint account for a loan, thinking it will not affect your credit report. But it will appear as debt on both your friend’s and your credit report. If your friend defaults, both the credit scores will get adversely affected. You can come out of this by requesting the creditor to take you off the account or have one party refinance the loan.
It Will Take Some Time To Raise Your Credit Score: You might believe that it may take a long time to improve your credit score. But it’s a misconception as credit scores get updated every 30 days and show your credit activity during that time period in the report. What you need to do is make timely payments without further use of any credit to show favourable activity during 30 days to improve your credit score.
Hence, you must be careful in your credit use to maintain a stable credit score.