Having good credit is important, but it’s not always clear what you should be doing to maintain a solid score. After all, the equations that determine credit score are complex, and many are kept under wraps as trade secrets. Mixed messages, second hand advice, and this admittedly confusing industry can make it very difficult to determine what the “real deal” in maintaining your credit score is. We’re here to bust some of the most prevalent credit myths so that you can build your credit confidently – without the mixed messages.
The logic here is clear. It is an easy assumption that keeping your borrowing lean and clean would look good to potential money lenders. However, in actuality, deleting your unused accounts will probably not help your score and may even harm it. By closing these accounts, you shrink your available credit and shorten your credit history, both of which can have a damaging effect on your credit score. Instead of cancelling those old accounts, consider just setting those cards aside and no longer using them. This will demonstrate to credit companies that you are a seasoned and responsible borrower—someone who won’t utilize all the credit they have access to.
There are two types of credit inquiries: “soft inquiries” and “hard inquiries”. Requesting to see your own credit score is a “soft inquiry,” and will not appear as a red flag to potential lenders. “Hard inquiries”, on the other hand, occur when a company requests access to your score for a legitimate business reason. In most cases, this is a result of you yourself applying for a service, loan, or new card.
This myth can be dangerous, as checking your credit score regularly is an important way to keep tabs on your credit and protect against identity theft. By all means, go ahead and check your credit, just be conscious of how many inquiries by larger businesses that you trigger. These are the ones that have the potential to lower your score.
This myth contributes to the idea that good credit is for wealthy people – and that’s not true! Your income only affects your credit score when it inhibits your ability to pay your bills. By budgeting well, living within your means, and paying your bills on time, you should be able to build a stellar credit score—regardless of your income.
However, your debt-to-income ratio, or DTI, can have an impact on your credit health. This is a number that is usually generated by dividing your monthly income by your total monthly debt payments. If you are spending a large amount of your monthly income on repaying your debts, this can indicate to lenders that you do not have the money available to repay additional borrowed funds. To keep your DTI low, try to avoid carrying a large amount of debt.
It might be tempting to co-sign on an account in in order to help out family or friends, but if you do, you will be held legally responsible for the account. This means that if you co-sign a loan with a friend and they make a late payment, it will have a negative impact on both of your credit scores. For this reason, it is important to make sure you trust the individual who you support by co-signing, and that they have the means to pay their share by themselves. After all, you are giving them power over your credit as well as their own.
Thankfully, credit cards are not the only way to build credit. Rental Kharma is proud to offer an alternative method for building credit that is perfect for individuals who are wary of cards. Our service allows home or apartment renters to build their credit score simply by paying their rent each month. If you pay on time, we will verify your payment and have it added to your credit report. It’s easy, efficient, and allows you to build credit with each passing month. In fact, Rental Kharma can even report past months or years of your rental history, which can immediately make a difference in your score.
Credit scores provide a picture of your credit risk at any given time. For this reason, they are inherently malleable and constantly changing as you make financial decisions each day. Furthermore, old credit history will gradually begin to have less of an impact on your score. That bill you forgot to pay last month will slowly become insignificant if you work hard and focus on making your payments on time in the future. By paying your bills on time, working to keep debt at a minimum, and being patient, anyone can build their credit score.
If you are a renter hoping to improve your rental score, Rental Kharma can help. We believe that good renters deserve good credit, and we want to see you reach your credit goals.