No matter how financially savvy you think you are, chances are you might be guilty of believing a few credit score myths. (Don’t worry, we get the whole thing can be a little confusing too.)
Here are a few of the most common misconceptions that we’re debunking:
1) Not having any debt means you have a good credit score.
If only it were that simple! It’s like looking at a blank resume of a candidate applying for a job, having no credit history is not necessarily a good thing. Part of your credit score is actually based on the quality of your repayment history, to see if you’re credit worthy. That’s why it’s important to prove to lenders that you’ve been responsible in the past and can be trusted with credit. That doesn’t mean you need to take on debt, having a mobile phone on a plan or being on a utility bill can also help you build a credit rating.
2) Every Aussie has one credit score.
False. In fact, most Aussies have multiple credit scores (in some cases more than 3). In Australia, there are three main credit reporting bureaus who have their own algorithms and credit scoring systems – which is why we have so many scores. It’s important to be across all of them because different lenders may preference one bureau over another.
3) Checking your credit score will hurt your score.
Short answer: no.
There are two types of credit enquiries which are categorised as either hard or soft. A hard enquiry occurs when a lender requests your credit score with the intent of assessing whether or not they should lend to you. This impacts your credit score.
A soft enquiry, on the other hand, is when you or an agent on your behalf simply seek out information about a credit score, without the intent of applying for any credit.
4) Getting married will merge your credit scores.
Your relationship might be until death do you part —?but don’t worry, your credit score isn’t. You and your spouse will continue to have entirely separate credit scores even after you tie the knot. But, keep in mind that any joint account activity will reflect on both of you.
5) Using ‘buy now, pay later’ services will negatively affect your credit score.
Buy now, pay later services such as Afterpay, Openpay and Zip Pay are handy tools that let you pay purchases off over time. Keep in mind that not all pay later providers assess your creditworthiness when you sign up. That means you could end up with bills that you can’t pay off, resulting in a hit to your credit score and difficulty borrowing in the future.
6) You need to have a high income to have a good credit score.
You know the phrase, “the more you have, the more you spend?” As far as we’re concerned, it’s all relative. Having a high income doesn’t necessarily make you any more responsible or financially stable. While steady employment does play a role in your credit rating, your actual income bracket is not a direct input factor.
7) You need to go into debt to build a good credit score.
The key phrase here is: into debt. Yes, you may need to demonstrate some credit behaviour such as showing that you’re capable of obtaining credit and paying off debt, but that can be a small amount – for example, a monthly phone bill. Remember, a credit score is a reflection of your credit history such as your credit enquiries and repaying your commitments, so staying on top of your payments, and limiting the number of credit enquiries you make, are also good ways to maintain a good credit score.
8) The more debt you have, the lower your credit score is.
We’re busting this one because not all debt is equal. There is good and bad debt, and your credit score reflects this. An example of good debt may be a home loan because that is seen as a healthy financial investment. Bad debts, on the other hand, could be $20K on a high-interest credit card, or even a $200 loan from a ‘payday’ lender. If you’re in debt because of a recent home purchase, you won’t necessarily have a poor credit score. As long as you pay your bills on time and are a responsible borrower, you’ll be just fine.
9) A ‘bad’ credit score means you will never get approved for credit.
The interesting thing about credit scores is that they can change. If your score isn’t where you want it to be, there are steps you can take to get it in better shape. These can be as simple as paying your bills on time or closing unused credit cards.
10) A credit repair company can improve your score.
In the majority of cases, a credit repair company can’t do anything that you’re not capable of. You are essentially paying them to do simple research for you. If you’re more of a self-starter, you can save yourself some money and take control of your finances yourself.
Disclaimer: This article contains general information only, and is not general advice or personal advice.