Most Americans have at least one credit card. In fact, the typical American owns at least four credit cards. This is according to Experian. But even with this magnitude of cardholders, a lot of them still don’t know much about credit cards and scores.
With regards to credit score, there are still a lot of credit score misconceptions. One of the probable reasons for this could be because not much about credit cards and credit scores are taught in schools or at all.
In fact, society even make people believe that having credit is bad. There’s even the trend of cutting up credit cards just so people won’t resort to using them. While this is understandable because of how tempting credit cards can be, you’ll learn how cutting up your credit cards can be a huge mistake.
While we focus on credit score in this article, we’ll still discuss much about credit cards as both go hand in hand. There are a handful of factors that determine your credit score. Those that don’t know this have their own wrong belief about credit score and this wrong belief can lead one to financial distress.
Can you guess the number of people who know what credit scores are about? While others do know certain perks of having a high credit score, a lot of people don’t know the essential purpose of credit scores.
According to CNBC, “only around one-fifth of people fully understand that a credit score determines interest-rate charges”. Moreover, 40% of individuals make the mistake of believing that marital status and age has something to do with credit score.
It’s not hard to imagine the consequences one can face without knowledge of credit score or if they believe in credit score misconceptions. Remember that 80% of people don’t have a firm grasp of how hazardous having a low credit score can be.
If you don’t know even the basics, you won’t know how to improve your credit score. Perhaps it is the lack of financial education focused on credit that is causing financial downfall due to the use of credit cards.
After you read this article, you’ll have a better understanding of your credit score and you can also better realize how credit cards are such powerful financial tools that can aid you and not harm you.
Here are the 3 common credit score misconceptions.
A lot of people believe that there’s just one credit score. A shocking 47% of people who haven’t obtained a credit report yet don’t know that there’s more than one. Believing that there’s just one credit score can put an individual into a disadvantage as different credit scoring systems have different ways of calculating scores.
Here are some examples of different credit scores and their ranges according to the Military Wallet:
Do you know people who resorted to cutting their credit cards in half so they can no longer use credit? Have you resorted to doing this as well? Here’s an explanation why you shouldn’t cut your credit cards.
There are five factors that determine your credit score. These are:
Having an old credit card helps you with achieving a high credit score because length of credit history makes up 15% of it. There’s also a lot of benefits with having a credit card and it’s tragic to lose all those perks because you decided to destroy yours.
The fear of falling into financial chaos happens if you don’t educate yourself enough about finance and when you’re not diligent with paying. As long as you keep studying about financial education and you’re confident with keeping up with your payment, there shouldn’t be a problem nor a reason to cut up your credit cards.
Know that credit cards are just financial tools and you are in no way a slave to the tools that are designed to serve you. The next time you decide on tearing your Amazon credit card or any other credit cards, remember that doing so is not the better choice.
Credit issuers often offer a limit increase after you show them that you are responsible with handling your debt over years of paying on-time. Don’t perceive this as a trap for you to use more credit.
A credit limit increase is a win-win for both the lender and the borrower. For you, as the borrower, having a higher credit limit means that you have a better chance of having a lower credit balance.
Remember that one of the five factors that determine your credit score is credit utilization. Credit utilization is the amount of credits you’ve borrowed.
A lower credit balance is better for your credit score as credit scoring systems categorize people with high credit balance as individuals who can’t manage their debt well.
A lot of people follow the 30% credit utilization rule as this proves to be an effective method for achieving and keeping a good credit score. Think about this when you are offered to have a credit limit increase. Of course, it’s still okay to decline.
Whenever there’s a new trend or belief about credit scores or credit cards, don’t conform but instead think for your own. Belief in facts and statistical data over popular opinions. Moreover, make an effort to know other do’s and don’ts when it comes to credit card usage.
We hope that this article has helped shed some light on these 3 common credit score misconceptions. What are other misconceptions that you’ve heard of? Let us know so we can debunk more of these myths.