Credit scores are some of the most misunderstood financial concepts in Australia. Today, credit is a highly important concept that dramatically impacts what we spend, how we budget, and where we focus our income. However, not everyone understands the specifics of their credit score, especially in the digital age.
Despite its near omnipresent status, Australian credit has become the mystical subject of half-truths and myths that have coloured public perception in many ways. Debunking outdated mindsets and wrong notions now can help you to make the best possible financial decisions in the future.
This article will explore 9 credit score myths that are in dire need of debunking, supplanting them with the information you need to enjoy true financial freedom.
1. Paying off debt makes it disappear
Even if you’re not making payments anymore, your previous debts will not be struck from the record. Credit card bills, payday loans, and other unsecured debts will likely remain on your report for years, impacting your score for decades. Be mindful of what loans you apply for, and consider whether you can pay it off or not.
A short note: paying off current debts does significantly clear up your financial burden. This is absolutely worth pursuing prior to applying for new loans, especially if you want the best possible interest rates.
2. Your credit score also lists your demographics
Your credit score is simply a numerical measurement that evaluates your history of debt management. It does not list races, ages, or other identifying demographics that could shift others’ perceptions of you. All that should be listed on your credit score is a number, a name, and a few additional elements.
3. There’s only one type of credit score you can have
Almost every lender on the marketplace uses a different system for checking and evaluating personal credit scores. In fact, the average Australian has many different credit scores associated with their name (depending on the lender in question). For this reason, you cannot expect to maintain the same score between two different providers.
4. Cutting up your credit card fixes your score
While doing away with your credit card could help you to spend less money, it will not necessarily fix your score. Interestingly, there is some evidence to suggest that unused credit scores may actually lower your credit score. Closing a card won’t affect your score, but giving up credit completely certainly will.
Instead of completely removing your credit card, consider only using it for certain purchases, or ‘fasting’ from it for a certain amount of time. Your card could be used for certain emergencies, and continue reinforcing your credit score as well. Moderation, not elimination, is key.
5. You can’t check your score without tanking your credit
There are two different types of credit checks: soft and hard inquiries. Soft inquiries will not influence your score. These are typically completed by insurance companies, employers, and credit solicitors. Applying for loans in general will produce a hard inquiry, reducing your credit score over time. For this reason, it’s vital to decide whether you want or need a loan before applying.
Personally checking your credit rating will never damage your credit score, now or ever. In fact, it doesn’t even count as an inquiry at all!
6. All debts are equal and look the same
Contrary to popular belief, there is a difference between ‘good debt’ and ‘bad debt.’ A large mortgage and an expensive boat may have the same price tag, but vendors will view them differently. Keep this in mind while making major spending decisions, and be mindful of the debts you choose to take on.
7. Credit bureaus actually fix your credit score
This popular myth has become one of the best marketing schemes of the decade. Credit enhancement facilities cannot erase or eliminate information from your record, which means they are often not worth the cost. By putting yourself on a strict budgetary regime, you can gradually increase your credit score over time – without paying steep fees and labour costs.
8. Your income will change your credit score.
This common myth is easily proven false. What really affects your credit score in Australia is:
Payment timeliness
Hard inquiries
Bankruptcy
Loan defaulting
Large amounts of debt
Although the steadiness of your income can impact loan applications and similar items, it cannot impact your credit rating in Australia.
9. Your credit score rating reflects how good you are
No matter who you are or your financial situation, your credit score should never be used to evaluate your personal character. You are more than the number on your screen, and your thoughts and feelings about yourself should not be impacted by what you see.
After all, what is a bad credit score but a good credit score in the making?
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