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Debunk your clients’ credit score myths
A good credit history and a high credit score are valuable assets that can help your clients access financing solutions and even get a better interest rate. Unfortunately, there are a lot of misconceptions around credit reporting, and these sometimes lead to harmful mistakes.
Here are five common myths, with simple explanations you can provide to help your clients protect their credit rating.
Myth #1: My salary affects my credit score.
Neither your salary nor your bank balance is included in your credit report, so they are not used to calculate your credit score. However, these may be factors that a financial institution will consider, alongside your credit score, when deciding whether to give you a loan.
Myth #2: Every credit check hurts my score.
There are two types of credit checks. A “hard hit” credit check, which occurs for example when you apply for credit, will be noted on your credit report. A “soft hit,” which occurs when you ask the agencies directly for your own credit report, does not appear. A lot of hard hits, especially over a longer period of time, may cause lenders to think you are urgently trying to get more credit or are living beyond your means, and can lower your credit score. But keep in mind that even new credit applications account for only a small percentage of your overall credit score.
Myth #3: Closing a credit card account or living debt-free will raise my score.
Your score is rated in part on the amount of credit you use relative to the amount of access to credit you have. Using credit to pay for something, and then paying it off on time, can help to raise your credit score. So can having different types of credit, such as a credit card, a car loan and a line of credit. Also, the longer you have a credit account open and active, the better it is for your score. If you never use credit, the system has no evidence that you can use it responsibly.
Myth #4: My score is the same as my spouse’s, and they become separate when we divorce.
Each person has their own individual credit histories. When you marry or live with someone, your credit reports and scores remain separate. However, any debts you take on jointly will appear on both reports. Your actions with these debts continue to affect both of you even if you divorce, unless you close those accounts.
Myth #5: A negative incident hurts my score for six years and there’s nothing I can do in the meantime.
It’s true that negative information such as missed payments or bounced cheques do stay on your report for six years. However, the bureaus may keep positive information longer. As time goes on, isolated negative incidents will be outweighed by positive behaviours. There are many things you can do to further improve your credit score during this time, such as using moderate amounts of credit and paying the entire balance on time, or reducing the amount of your outstanding debts relative to your available credit.