To get a car loan, you need to have a credit score. While finance is open to all, you need some kind of credit record and a corresponding score for lenders to be able to decide how much of a risk you are and what kind of deal they can offer. Unfortunately, there are a lot of myths around credit scores, some of which we are going to bust today.
Next week I shall bust another five credit score myths as there seem to be lots of them around!
You cannot escape bad credit
Once you have bad credit, it will always be with you, or words to that effect. We have seen this lots of times on the internet and discussing with clients. It simply is not true. Sure, before the crash in 2007/8, bad credit did haunt you for a while but even then you could repair it and move on.
That is even more true now. Credit scores can be rebuilt in any number of ways to make a bad credit history a thing of the past.
Credit checks damage your score
This is a very common myth and is not always true. There are two types of credit checks, a soft inquiry and a hard inquiry. A soft inquiry checks your score and your credit history and is used by many institutions in credit checks. Soft inquiries are not recorded on your credit report.
A hard inquiry is more in-depth and is what a lender would make once you apply for credit. This is recorded on your report. One or two hard inquiries along the same lines will not damage your score. Multiple hard inquiries for many lines of credit in a short period of time may impact your score.
Having lots of credit cards can boost your credit score
This is also a myth in part. Have too much credit on too many credit cards and your credit utilization ratio will be impacted. This does not boost or damage your credit score but does factor into a lender’s decision to lend or not. If you already have lots of debt, your score might be high but affordability low. So while your score remains intact, you still might not get the finance you’re looking for.
Conversely, shut down all your credit cards and it will be harder for a lender to see your financial habits. This can slow the rate of growth in your credit score.
Being debt free will boost your credit score
This is also part myth. Having a low debt ratio will work in your favour when it comes to borrowing but won’t necessarily be reflected in your credit score. Having never had debt actually works against you as you have no credit history. A credit score is a measure of your credit history. If you don’t have any, your score has nothing to go on.
You may have paid cash for everything and always paid on time, but there is no paper trail to prove that. Therefore, while it may seem counterintuitive to penalize someone for remaining debt-free, without a credit history, you are an unknown to a lender.
You should only check your credit score just before applying for a car loan
This is definitely a myth. With the prevalence of identity theft, you should keep a regular eye on your credit score to look for anomalies. You should definitely look just before applying for a car loan but you need to check it regularly throughout the year for mistakes, fraud and anything else that doesn’t look right.
Join us next week when we bust another five credit score myths!