Common Myths About Bad Credit
If you have bad credit, you have probably researched tips on how to improve your credit score, things that hurt it, and how to monitor your score. You may also have believed a few popular myths, about credit scores. Let’s debunk these common myths.
4 Most Common Myths About Having A Bad Credit Score
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All Debt Hurts Your Credit Score
The first myth is that all debts are equal and that they are all bad for your credit score. This is incorrect. Some debts are considered to be bad spending debt (bad debts), while others are considered good spending debts (good debts). Bad debt is debt that you use to purchase non-essential things or assets that quickly depreciate. In contrast, good debt is debt used to fund things that will enhance your life or increase your wealth.
Think of the difference between getting a fixed-rate convenient loan to start your business and maxing out your credit card during a vacation.
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Closing A Credit Card Will Help Your Score
While credit cards are not always good for your finances, closing your credit card is not guaranteed to help your score either. Although you will be eliminating one of your spending debt, you will also be reducing your available credit, which could increase your credit utilization rate. Closing an old credit card will also reduce your credit history or the average age of your accounts.
Closing a credit card could have either positive or negative effects on your credit score. You have to consider how it will impact the factors that affect your credit score.
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Paying Off Debt Will Boost Credit Score
This is another complicated myth. It mostly depends on the kind of debt you are paying off. On one hand, you are not likely to see a sudden improvement in your credit score, as soon as you pay off a loan. This is because you are closing a credit line, which reduces your available credit. But it’s not all bad, because it will be reflected positively in your credit history as a loan that you managed and paid well.
On the other hand, when your credit card remains open, the available credit usually increases and that is good for your credit score.
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You Have To Be Rich To Have A Good Credit Score
Credit scores do not have anything to do with wealth. They are simply a way to measure how your credit is risk rated among lenders and other financial institutions. Having a bad credit score means you have a higher tendency to default on a loan or miss some payments.
Having a high salary does not guarantee a good credit score because it does not mean that you will not default on your loan. What truly matters for credit scores is how you manage your wealth and your debts. So, it is possible to have a good credit score even if you have a relatively low salary, as long as you manage your finances well.
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