Personal Loans and Credit Score Myths

When taking out a personal loan, or any type of loan for that matter, it’s quite common for lenders to check your credit score and history. Because the credit score formula isn’t known, there are a lot of myths out there when it comes to what you should and should not do, and more importantly, what is or isn’t taken into account on your score. Here, we will take a look at some of the most well-known myths about personal loans and credit scores.

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If I Use Cash and Debit Cards for Everything, It’s the Best Way to Boost My Score

While you shouldn’t charge everything, your credit score is boosted by a strong history of payments that are made on time, over time. When you are using cash or debit cards,the bank is not lending you any money, and therefore, these payments are not included in your credit score. Using cash or debit cards might help you to stick to a budget, but in the end, it does nothing for your credit score, except for possibly keeping you from running up large debts that would impact you negatively financially.

In general, a lot of people build up their credit and improve their score by using one credit card for a specific purpose. For example, it’s quite common for somebody to have a small credit card that they use to purchase gas for their car. They will keep a very small balance on those cards, showing that they are more than willing to pay a large portion of their debts every month, but not close out the debt every month. In this way,they have shown the credit card company that they have responsibly handled their debt and have provided value to that company by paying a small amount of interest every month. If you are able to pay off your credit card account in full every month though, do so.

Closing Credit Card Accounts Can Help Your Credit Score

This is not true at all. If you can think of it this way, credit utilization is a portion of your score. Credit utilization means that you are using a limited amount of the credit available. Obviously, if you close a $5,000 credit account, you are taking away some of the potential credit that you had, thereby automatically raising outstanding balances in proportion to your overall credit available. Keep your old accounts open as long as you can, and make sure that when you do use them, you pay them off in a timely manner.

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My Bank Account Matters and So Does My Income

Your bank account balance is not reported to the credit agency. Because of this, it has no bearing on your credit score as to how much money you have in your checking account. Your income isn’t reported either, as your employer does not send that information to Equifax or any of the other companies. Because of this, you should focus solely on your credit history and your spending habits. While loans will ask you how much you make per year, quite frankly, lenders know that you can put almost any number you want in that box.

Shopping Around for Loans Will Hurt my Credit Score

This is a myth that is borne out of the way things used to be done. There is a window of opportunity that you have to make several credit inquiries, as credit reporting agencies have come to the realization that most people will shop around for better mortgages,auto loans, or perhaps even personal loans. Because of this, don’t be afraid to shop around for a better interest rate on a loan, but do so in a short amount of time as it shows you are serious about taking out a loan and not simply taking a chance to see what money you could get.

If You Pay Back a Bad Debt, It Will Be Deleted from Your Credit Report

While it is better to pay off a bad debt, it will still appear on your credit report as being extremely late. This can and will have an effect on your eligibility of a personal loan, and if you have defaulted on a loan before, you can almost guarantee that you will need to take out a secured loan, meaning that you are going to need to provide some type of collateral, such as a home or an automobile, in order to qualify for the loan.

Unfortunately, once you default on a loan, the best thing you can do is pay it off and simply live with the tagline of “defaulted but made good later on.” This is not as bad as simply walking away from a loan or debt, as it shows the creditor that they won’t need to chase you in order to get paid. Be responsible when it comes to paying back any loan and this will have a positive impact on the interest rates you pay on your loans in the long-term, as well as on your credit score.