Credit reports were implemented by banks in the 1980s and, since then, they have become an essential part of our lives. Unfortunately, we usually have limited knowledge about it.
Our valuation as borrowers is measured through credit reports, so it is really important to fully understand how they work, because lenders will check your score before signing the approval of a loan or before you can rent an apartment on your own.
However, there are many things that are said about credit scores and some of them are not entirely true. Here’s a list of the 3 most common misconceptions about credit reports:
1- There’s only one credit score
On the contrary, there are several ways of calculating a person’s credit score. The most popular one is FICO, with a score range from 300 to 850. The higher the number, the better your image as a borrower. Keep in mind that scores form different companies may vary by several points.
2- Checking your credit will lower your score
We hear this a lot, but this is not entirely true. There are two ways of requesting a credit score: soft inquiry and hard inquiry.
A soft inquiry is the one that you can request yourself, and it’s usually the one requested by most companies, unless you apply for a loan. This type of inquiry will not affect your score.
On the other hand, a hard inquiry is the one requested when you apply for a loan. This type of inquire will lower your score a few points, so you need to think carefully before you request loans.
3- Closing credit accounts will improve your score
This is probably the biggest misconception consumers have. The truth is that closing your credit accounts might have the opposite effect, because it decreases the amount of credit available to you in relation to the balances you owe. The higher the ratio is, the lower your rating will be.