March 16, 2012 | 
Author For a long time, people did not know how credit scores were calculated and the company doing it was not keen in allowing people to find out how it is done. In the year 2000, E-Loan allowed customers to start seeing their scores. Even with such information, people have come up with myths that have made people not to understand the important things about their financial lives. Some of the areas where credit scores are used include:
- By lenders to determine if you qualify for a loan or credit card along with the interest rates that you will be required to pay
- By insurers to set premiums
- By landlords to determine if you qualify to get their rental houses
- By utilities companies to determine whether you need to leave a deposit and the amount
- By cell phone companies to determine those who can sign a contract with them and who does not quality
If you do not understand credit scores and how they work, it can put a big dent into your financial life. There are some myths that people have come up with that need to be dispelled. Some of them are:
1. If you handle your finances well, your credit scores will take care of themselves
The fact is that a credit score is not a financial health score. It does not measure the income, assets and financial capabilities. You may be having the money but some of your behaviors affect your scores badly. The credit scoring formulas help lenders to gauge the likelihood of you defaulting based on how you handle your credit. If you stop using some of your cards and overuse others and maxing them out, your credit score could suffer.
2. Checking your credit report hurts your credit scores
The fact is that checking your credit report does not in any way affect the credit scores. It can only get affected if you asked someone else to do it for you like a friend, bank or a car dealer. These are considered hard enquiries and they lower the score. People who believe this myth suffer in a big way because they are not able to access their credit reports for fear of lowering the scores.
3. You should ask for lower limits to help your credit
The fact is that having a manageable credit limit is a good thing for the score as long as you do not use them and end up in debt. Lenders like to see a big gap between your available limits and the amount of credit you are actually using. The lower limit reduces the gap and this messes up the credit score.
4. You need to have a credit card balance to be able to get good scores
The fact is that you do not need to be in debt or pay any interest to have good credit scores. The credit reports and credit scores work independently whether you have a full balance that you pay in full at the end of the month or not. This is because the balances reported to the credit bureaus are from the last statement.
5. You should never close an account
The fact is that closing an account does not help you score highly. It actually hurts the score. If you do not plan to use a particular account you can pay it off and reduce the balances to zero. That will definitely lift your score.
6. How you handle credit indicates how trustworthy you are
The fact is that there are many reasons that make people get into financial problems. Some are avoidable and others like sickness are unavoidable and this has been found to contribute to bankruptcies by up to two thirds of the reported cases.
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