There are many myths and half truths regarding credit and it can be difficult to know what is factual. Credit, good or bad, has such an influence on your quality of life that it is wise to have a basic understanding of how it works. While not an exhaustive list, here are a few common misconceptions, and what actually will build your credit.
Just the Facts
- A credit score and credit history is the same thing. A credit score is a numerical 'snapshot' of your credit history. How much debt you have, and how timely you are with payments are a part of your history.
- My credit score is better/worse than it actually is. Believing does not equal knowing what shape your credit profile is in. Contrary to popular thinking, checking your own credit will not lower your score.
- My bank accounts and debit card help my rating. Checking, savings and other accounts such as investments, have no bearing on your credit. When at the checkout, choosing to have a cashier run your debit card as credit will not help your rating.
- Closing old and inactive accounts will boost my rating. Closing old accounts can actually harm your score by eliminating a history of good standing accounts, and lowering the amount of credit you have available.
- I pay my bills on time, and have no debt, so my credit must be good. It is important to check your credit regularly, to monitor for identification theft, or simple errors that unnecessarily bring your score down.
- I have a good job and make a lot of money, so I must have good credit. The only correlation between your income and your credit is the ability to pay your debt. A six figure salary will not have any more impact on your credit than a lesser one.
- My score is negatively affected by my race, age, sex, or marital status. The Equal Credit Opportunity Act was put into place to make sure that there is no discrimination in the reporting of your credit habits. Your credit history is solely based upon your financial activity.
What Does Affect Your Score
There are five factors that do affect your credit, and attention to each part will result in a healthy, well rounded score.
- 35% Payment History How timely you repay bills has the biggest affect on your credit score. Negative marks in your credit history from late payments will stay on your report almost as long as a bankruptcy.
- 30% Debts Owed Debt to Income ratio is available income, in relation to the debt you have. This is why you do not want to close available credit accounts, as this can lower your score.
- 15% Length of Credit History How long accounts have existed in good standing matters, so this is why you do not want to close accounts.
- 10% New Credit Proof that creditors are willing to extend you lines of credit speaks to your credit worthiness.
- 10% Mix of Credit A mix of credit cards and installment loans, such as the ones you take out for cars, mortgages, and student loans create a well rounded credit profile.
One final misconception is that if you have poor credit, you cannot get a car loan, and this is simply not true. At Auto Credit Express, we specialize in helping people with damaged credit that need a vehicle. Rebuilding and repairing your credit is easier than ever when you fill out our quick and secure application.