There are many myths of credit scoring that should be revealed. For those who believe that having bad credit is not a big deal, you are very wrong. Bad credit can cost you many, such as increase interest rates on loans you may take out and make you pay more for insurance. It could also cause people to reject you for employment and refuse to give you an apartment.
For these reasons, it is very important to know where your credit stands. There are ranges that most lenders go by when looking at credit scores. They are as follows:
- 700 to 850 – Very good or excellent credit score
- 680 to 699 – Good credit score
- 620 to 679 – Average or OK score
- 580 to 619 – Low credit score
- 500 to 579 – Poor credit score
- 300 to 499 – Bad credit score
When you are aware of your credit score, you are aware of how creditors and will view you. Your score can be viewed one per year through one of the three credit bureaus.
Myths of Credit Scoring #1
The first of multiple myths in credit scoring is that a minor late payment won’t affect your score. This may seem logical but it isn’t true. If by missing a payment, no matter how minor that payment is, your account has become delinquent then it will be reported to a credit bureau and will affect your score.
There are two things that must be understood about delinquent accounts. The first is a minor derogatory item, which is when a historical delinquency doesn’t is paid before it is 90 days overdue. The second term to understand is a major derogatory item, which is when a historical delinquency goes past the 90 day overdue mark.
All of this means that if you are 30 days late on a payment then your score will still be later than if you had paid on time. At this point your score could be lowered by 35 to 50 points. After 60 days your score will be reduced by 100 points.
Your credit score drops to display to creditors whether or not you are willing to let your due date pass without making the required payment. This is basically to show creditors and other people such as potential employers how trust worthy and responsible you are after making a commitment.
It also should be known that creditors cannot report that your payment is late until at least 30 days. Therefore if you are only 1 to 2 weeks late it will not be reported, but as soon as it hits the 30 day mark, “30-day late” will be shown on your credit report. This also means that if you make a late payment after 58 or 59 days it will still only be reported as 30 days late. This is because creditors cannot make another report of a late payment until the 60 day mark.
Myths of Credit Scoring #2
The second of the myths in credit scoring is that in order to fix the damage done to your credit score, all you have to do is catch up on payments. Your score will improve slightly when you catch up on payments but it will not be back to where it was when you began missing payments. Creditors only update credit reports once per month so if your credit report shows that you are currently past due and it hasn’t been a month since that update it may stay in that state for another month. Also your credit score will not show any improvement until the next update.
When you look at your credit score you can see others inquiries. There may be many inquiries from credit card companies checking to see if they still want to do business with you. If your credit report displays that you are unreliable then they may drop you or lower your credit limits.
Myths of Credit Scoring #3 and #4
Some believe that if you take care of your finances, your credit score will take care of itself. If you stop using a credit card then you won’t be building or sustaining your credit. Also by only using one card and closing accounts it displays bad credit habits. Maxing out a credit card, even if you pay it all back in full will still bring down your credit score.
The fourth myth is that checking your credit will damage your credit score. This is not true. Looking at your own scores will not affect your credit score but when there is a “hard” inquiry, where others are looking at your credit score it would affect it. This could be one of the worst myths because it stops a lot of people from checking their score regularly. It has been found that 20% of peoples’ credit reports, in the U.S. contain errors. It was also found that 5% of those errors are serious enough to damage those people’s credit scores.
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