Credit scores are often the determining factor when it comes to eligibility for loans, cars, homes, etc.; and many Americans take advantage of the infamous credit card, as $57 billion in new credit card debt is computed annually. Understanding how credit scores work is essential to securing financial stability. Here are six of the greatest credit card myths explained:
NEW CREDIT CARDS DEVASTATE YOUR CREDIT SCORES
First, it is important to note the difference between long-term and short-term credit scores. Applying for a line of credit is typically depicted as a “hard” check an overall credit score. This “hard” check is used to show other banks and lenders that you have recently applied for credit elsewhere, and has a short-term, negative impact on your credit score. This can be damaging for short term applications, but overall, it is important that you apply for new cards as you grow. This is because level of credit utilization is a significant component to your overall credit score, so having cards that have a high portion of unutilized balance will help your score long-term.
RESIST CREDIT INCREASES
Creditors that have high-interest rates and fees will usually provide unsolicited credit line increases on your account, often without your knowledge. Obtaining extra credit is a good opportunity to boost your score over time. Just be cautious not to offset the advantages of available credit by overextending yourself.
CHECKING YOUR SCORES HURTS THEM
When a consumer checks his or her own credit score, it results in a “soft” check. Soft checks have no impact on the overall score calculation, and are very helpful so that you are aware of where you stand with your creditors. It is recommend that you check your credit report at least once a year in order to ensure that it is accurate. However, you should minimize the number of accounts you apply for since multiple hard checks in a short time can indicate to lenders that you are struggling to get for approved for credit.
CREDIT SCORE IS AFFECTED BY INCOME
Income does not directly affect your credit score; rather it is an indirect component. With that said, credit bureaus don’t have your income history nor ask for it. However, individual creditors use current income to determine eligibility for credit products. By understanding your current commitments, creditors feel that they will be better prepared to determine the likelihood that you will be able to pay back the loan.
CLOSING UNUSED CARDS HELPS YOUR SCORE
It may be counterintuitive, but closing existing revolving accounts tends to harm your credit score. The goal of credit cards is to show that you are able to manage your accounts and financial habits responsibly over time. So closing an account with a lengthy history terminates the relationship, and may affect your score. Not to mention that by closing accounts, you reduce your available credit and increase your ratio of used credit to available credit, which brings down your score. It is usually best to keep unused accounts open, as long as you are sure to keep all of your information up to date with the bank.
LENDERS ARE REQUIRED TO ADHERE TO CREDIT SCORES
Lenders may justify their decisions using credit scores, but they are not required to inform consumers or businesses as to what they view as disqualifying criteria. Having a minimum credit score may be required for a certain type of loan, but having this score doesn’t guarantee that you will be approved. For example, a number of mortgage loan programs are backed by the government, thus having minimum credit score and credit history requirements. Alternatively, when dealing with lenders, it is important to explain any credit blemishes and illustrate overall financial stability in recent years.
FIND OUT IF IT’S RIGHT FOR YOU
Here at Ultegra Business, we work with businesses in any stage of growth. Our team is equipped with a diverse set of financial knowledge and is happy to explore potential funding options, as well as answer any questions that may arise. Our unique one-on-one approach has allowed us to successfully offer loan approvals to over 90% of our applicants. If you’d like to learn more about Ultegra Business, give us a call at 1.888.893.6828 and speak with a loan advisor today, or apply online now. We look forward to helping you think outside the bank!