Credit Score Myths and Facts: Here’s What You Need To KnowApr 18, 2018
You’ve made a plan to conquer your debt in 2018. You’re doing well as you’d like, however, there’s one thing that you’re still a little confused about — your credit score.
If you’re confused when it comes to your score, don’t worry. You’re not alone. In fact, there are many misconceptions and misunderstandings amongst Canadians when it comes to their credit score. As discussed in this podcast, here’s some helpful information about credit scores to help you better understand where you stand and, if you have a lower credit score, the steps you can take to improve it:
- Myth Number One: Checking my credit score will damage it.
It’s a popular myth that checking your credit score can actually cause negative damage to your score. In truth, checking your own credit score is considered a ‘soft hit’ and will not cause any negative damage. In fact, it’s a good idea to check your score periodically in order to know where you stand and avoid any unpleasant surprises in the future. If you find that your score is a little lower than you expected, it also provides you with an opportunity to take the steps needed to repair and improve it.
- Myth Number Two: The amount of credit card debt I carry doesn’t affect my score if I make my minimum payments.
Many people are also not aware of the impact that high credit card debt can have on your overall credit score, even if you are making the minimum payments each month. One of the factors used to calculate your score is credit utilization. Essentially, credit utilization is the ratio between your credit limit and the balance you carry. The higher your balance is to the total limit, the more your credit score could be affected. Ideally, you should keep your credit utilization below 30 per cent. For example, on a $10 000 credit card, you shouldn’t utilize more than $3,000 to maintain a healthy credit score.
- Myth Number Three: I should avoid the use of credit altogether in order to improve my credit score.
Although high credit card debt can be problematic when it comes to your personal credit score, it doesn’t necessarily mean that you need to get rid of all your credit cards full-stop. Having a credit card helps to establish your credit, and closing older credit cards will only shorten your credit report history. Moreover, as discussed in the podcast, closing your accounts with available credit on them will only leave you with the credit cards with a high credit utilization ratio, which, again, will cause problems when it comes to your personal score.