There are a few credit score models that lenders use in order to assess the risk of lending you money. Which model they would consider for risk assessment cannot be determined beforehand, and this is something lenders do not disclose. Well, whatever the scoring model they use, you must have a good credit rating in order to qualify for lower interest rates. There are several myths that people have about credit scoring.

It is vital to debunk these myths when it comes to building a credit score because it is your credit rating that can make it or break it. A three-digit score that your credit report shows influences how much money you would be able to borrow and what interest rates you would be able to qualify for.

Top myths about the perfect credit score model

Here are the myths about the perfect credit score model:

§  One credit model is better than the other

Some people assume that the FICO credit model is better than the VantageScore model, while others think vice versa. The fact is that neither of them is better. Each credit score model uses different formulas to calculate your credit score. However, lenders have used the FICO credit model for a long period of time, and it is the most popular model. Credit reference agencies have produced the VantageScore model. Not many lenders use this model.

It does not matter which model your lenders use to determine the risk involved in lending you money because ultimately, your credit score is largely dependent on factors such as how much debt you owe, credit length, credit mix, and payment history.

§  More data leads to better predictions

It is assumed that if the lender has more data about your credit in the past, they will be able to make better predictions about your repayment capacity. The fact is that the volume of data does not guarantee accuracy.

Your past payments only reveal how you manage to repay your debt, but that cannot suggest whether you will be able to repay your debt on time in future. Lenders can calculate your credit score based on the credit information they have by using any credit model, but data cannot capture your creditworthiness. So, even though you have an inordinate amount of data on your credit report, lenders might fail to determine accurate risks.

§  AI can replace human judgement

Thousands of applications are submitted for guaranteed approval direct lender loans, for example. Lenders rely on AI tools to quickly shortlist applications based on the criteria they have set. There is no doubt that AI has sped up the shortlisting process, but it does not insinuate that AI can completely replace human judgment.

The role of AI in shortlisting applications is limited to summarising documents and flagging anomalies. But when it comes to making a decision, AI lacks emotional intelligence. A borrower likely has a good credit history whose application AI will certainly approve on the grounds of credit rating, but a lender might not be able to approbate because income is not high enough.

AI lacks emotional intelligence and sound judgment. It makes a decision based on what it is fed. Therefore, there is no possibility that AI will ignore the involvement of a lender in deciding whether or not to lend money.

§  Credit models are transparent

Credit score models are considered transparent, but this is simply a myth that must be debunked. It is worth noting that it is impossible for lenders to frame a formula that helps them determine the accurate risk involved in lending money to you. To some extent, the decision is made by AI. It is not feasible for lenders to thoroughly evaluate each applicant's report. AI can be subjective based on the data used to make decisions, whether to accept or reject an application.

While lenders promise that they will not approve an application if they find that the repaying capacity of a borrower is not strong. It can be hard to determine the risk involved accurately. There is no guarantee that you will not struggle with payments, even if they have approved you.

§  No debt means excellent credit

Some people assume that they will be able to qualify for a loan easily if they have no credit history at all. A good credit score is assigned to those who show a responsible use of credit, not to those who completely avoid credit.

It is recommended that you take out instalment loans because they help prove credibility despite the ups and downs in your financial condition. If you usually rely on small loans to be paid off in one fell swoop or credit card bills, you will unlikely see any improvement in your credit file. Consider taking out credit builder loans if you do not have a credit history at all. If you use a credit card, make sure that you settle your bills on time.

§  Checking hurts your credit score

Self-checking of your credit score will not hurt you. No matter how many times you do it, it does not pull your credit points. Your credit score will go down only when hard inquiries are made on your credit report. This happens when lenders check your credit rating in order to determine the risk involved in lending money to you. However, this is a temporary effect. Your score will bounce back as soon as you start making payments on time.

Hard inquiries are made only when you are looking to borrow a large amount of money. Otherwise, lenders run only soft inquiries. They do not get recorded on your credit file. It means you will not lose your credit points. Soft inquiries are made only when you are planning to take out payday loans.

§  Closing old accounts boosts your credit score

Many people think that closing old accounts will boost their credit score, but this is a big myth. The fact is that long-standing accounts should not be closed because they will shorten the length of credit. Further, they also increase the credit utilisation ratio. Both of them will lower your credit score.

Even if your old credit cards cost you some fees, you should not close them to protect your credit rating. Closing them will save you money on fees, but it will cost you high interest rates as your credit score will be lower.

§  Credit models treat all debts the same way

Do not be under the impression that credit models use the same method for all types of debt to determine your affordability and risk. For instance, having multiple payday loans, even though they have been paid on time, could affect your ability to qualify for a mortgage. However, you still have a credit mix. Having different types of debts is more favourable than having multiple credit cards.

The bottom line

No matter which credit model your lender is referring to, it does not guarantee 100% transparency. It is likely that you get approved for a larger loan than your affordability, or you are perceived as a risky borrower despite on-time payments in the past.

You should try to keep your score in good condition because your chances of qualifying for lower interest rates highly depend on this.