If you are in debt, your credit score is very important because it can help you find a way out. If you have a good credit score, it will be easier for you to refinance your debt at a lower interest rate. This will lower the amount you have to pay each month, giving you more money to pay off your debts in less time.
But a lot of people don't know how the credit rating system works. And the fact that there are so many credit myths makes it even harder to know what affects your credit score and what doesn't. So, here are some of the most common credit myths, along with the truth about them and steps you can take to improve your credit score.
Myth 4: People who live at your address can hurt your credit score
This isn't really a myth; it's more of a misunderstanding. In the past, lenders often looked at the credit reports of people who lived at the same address as you. When deciding whether or not to give a loan, their findings were often taken into account.
This is no longer done in many countries. But your credit report still has information about your financial partners (for example, people that you share a joint mortgage or bank account with).
Lenders use this information to find out if your financial partners are a good risk. This could be people who live at your address or it could not. And if they have a bad credit history, it could hurt your chances of getting a loan, even if your credit history is good.
If you want to avoid problems, check your credit record to see who you have done business with in the past. Make sure the information is up-to-date and accurate. Dispute any inaccuracies. And before you send in your credit application, make sure your financial partners check their records and fix any mistakes they find.
Myth 5: Your past debts don't matter.
Oh, they sure do. The goal of a credit report is to give lenders a complete picture of how you've handled your money over the past few years. So, if you haven't paid your debts and a court has put a judgement against you, you'll have a bad credit record and most lenders will turn you down. This is true even if your finances have gotten much better in recent years.
In general, loan payments that you don't make will stay on your credit report for three years. Judgements last for six years, and proof of bankruptcy can stay around for as long as 15 years. These limits will vary from country to country, but as a general rule, the worse your financial history, the longer it will take to get out from under it.
But even if your credit history is bad, there are things you can do to make things better. Most of the time, you can add a note to your credit report to explain something. This will let potential lenders know what happened when you had credit problems in the past. For example, if you were sick or lost your job and missed a couple of mortgage payments, many lenders will take this into account when deciding whether or not to give you a loan.
Other than that, the best way to improve your credit is to pay off any old debts and keep paying your current debts on time and in full every month.
Credit Myth 6: A person can only have one credit score.
This not-so-obvious credit myth is easy to understand. And in some ways, it's true. In general, a person can only have one credit report (unless you count the credit rating that a person's business can have, but let's not make things more complicated), but different lenders can look at it in different ways depending on your current situation.
First of all, every lender has their own way of figuring out what your credit report says about you based on your credit score. For different types of loans, like mortgages, personal loans, store cards, and credit cards, lenders will also use different criteria to decide if you are eligible. So, missing a few mortgage payments might hurt your credit score with most mortgage lenders, but it might not hurt your chances of getting a store card as much.
