When you apply for a new credit card, your credit score is a key piece of information the bank considers before approving or denying you.
This three-digit number gives lenders a picture of your credit risk; it evaluates the information on your credit report and calculates the likelihood that you’ll be at least 90 days late repaying a creditor within the next 24 months.
There are several different types of credit scores, but the FICO Score, which ranges from 300 to 850, is the most widely recognized. FICO reports that 90% of top lenders use their credit scores to make lending decisions.
The average FICO Score is 717, according to the latest FICO report.
There are some common misconceptions about improving your credit and, thus, your chances of being approved for a new card.
Here are four myths about credit scores.
Your age affects your credit score
You may have heard that age plays a role in determining one’s credit score. It’s true that a 50-year-old consumer with a long history of on-time payments has the potential for higher credit than a 20-year-old consumer who just opened their first credit card. But that doesn’t mean the 50-year-old automatically gets a higher score.
The number of years you’ve been alive isn’t a factor in your credit score — the age of the accounts on your credit report is what matters.
A balance will give you a boost
Many borrowers believe that carrying a balance on their credit cards is wise from a credit-scoring perspective, as it would improve their credit scores.
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But carrying a credit card balance won’t help you. In fact, revolving a credit card balance from month to month might hurt your scores instead. As far as credit scores are concerned, customers who pay on time and maintain low balance-to-limit (aka “credit utilization”) ratios will be rewarded the most.
Cardholders who pay their statement balances in full each month stand to save a lot of money in interest fees as well.
Closing cards will help your score
Reducing the number of cards in your wallet may seem wise, but closing old cards can often backfire. You won’t immediately lower your average age of credit when you close a card. The closed account will stay on your credit report for up to 10 years and will continue to age while it’s there. And a credit card closure might trigger other problems.
Closing a credit card may increase your overall credit utilization ratio, especially if the account you’re closing has a $0 balance. You’re essentially keeping the same outstanding balance but spreading it across a smaller total line of credit, bumping up your utilization. When your credit utilization increases, there’s a risk that your credit score may do the opposite.
Generally, you should only close a credit card account if you have a good reason (such as a divorce or a high annual fee on an account that no longer benefits you). Before you close a credit card, it’s best to make sure all of your other card balances are paid off to $0 first. Otherwise, the account closure might push your score in the wrong direction.
If you are seriously considering closing a card, don’t hesitate to call and ask about a retention offer. An issuer may give you bonus points or a reduced annual fee as an incentive to get you to keep a card open.
Finally, remember that personal credit cards aren’t the only pieces of plastic that can affect your credit score. Small-business cards can affect it as well.
Checking your score will cost you cash
In the past, tracking your credit reports and scores used to be challenging and often expensive. But now, it’s easy to keep an eye on your credit every month.
There are many ways to check your score for free. You can (and should) download a free copy of all three of your credit reports once every week from AnnualCreditReport.com.
Additionally, many credit card issuers allow you to check your FICO score through their online accounts — and will even alert you when there has been a significant change in your credit report.
The health of your credit affects your finances in many ways. Your credit can impact opening an awesome new rewards card, but it can also indicate whether you need to start with secured cards to build or rebuild your credit rating first.
The effect of your credit score goes beyond just the world of credit cards. Utility companies, landlords and insurance companies may use your credit score to evaluate your risk as a potential customer or tenant as well. If you’re taking out a car loan or a mortgage, a higher credit score can get you a more favorable interest rate.
Finally, your credit reports (not your scores) can even affect your ability to get certain jobs or security clearances.
In short, you should absolutely know where your credit score stands — and checking it will generally not cost you.
Bottom line
There are many misconceptions in the world of personal finance, especially as they relate to lines of credit.
Therefore, it’s critical to make your credit decisions based on facts rather than assumptions. This will help you maintain a good credit score — and may ultimately save you cash the next time you need to take out a loan.
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