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Myths Debunked: What Really Affects Your Credit Score

Growing a business may involve requesting a loan to increase your working capital. While this may sound easy, prospective lenders will check a specific score to determine whether you can get a loan. This score is found on a credit report detailing your current credit profile. If your credit scores are good, your chances of accessing better deals on loans increase.

Though various factors affect your credit report, various myths regarding your credit score have cropped up.

How is a credit score calculated, and is it bad to review credit scores? Does not having any debt or gaining a high income affect your credit rating?

This article debunks common myths, factors that increase credit risk, and efficient ways to protect your credit score and secure a loan to help your business flourish.

Myth #1: Checking Your Credit Score Lowers Your Credit Score

You have the right to get your free credit report every three months. This report details your credit score and rating, any credit product you have, and your repayment history. It shows lenders your chances of getting a loan or credit card.

While some believe checking this credit report affects the score, this is untrue. Getting the report for free or buying it doesn’t affect the score since it is a soft enquiry.

There are two types of enquiries in Australia: hard and soft enquiry. These are their key features:

  • Hard Enquiry: This occurs when lenders view your credit report to check whether your credit profile and repayment history match loan requirements, impacting your score.
  • Soft Enquiry: This happens when you or your representatives get the report to check your credit information without any intent to get loans.

Any requests for your credit report by credit providers will appear on the report, but it won’t lower your credit rating. Getting your report for free whenever possible is recommended to gain a wider perspective on your credit health.

Not only will you better understand how your score is faring, but you will also know which loans you can secure and decide how to improve the score.

Myth #2: ‘Buy Now, Pay Later’ Services Negatively Affect Your Credit Score

Online shopping services give access to various products through “buy now, pay later” services. These services let consumers receive the item and then pay back the money to the site in set instalments.

Since they work similarly to loans, some believe these services affect your score and credit. However, the fact is that it only affects credit scores if you fail to pay the product’s full amount.

Like all loans, repayment is crucial to protect your score. If a person essentially gets the product for free, they face a large blow to their score directly and legal consequences.

To avoid such circumstances, it is crucial to note how much each product is and when to pay the full amount. Doing so simultaneously helps protect your score and increases the chances of receiving future loans.

Myth #3: A High Income Means A High Credit Score

While income may affect your score, it does not show on your credit report. Instead, the report contains personal details and details of past repayments to avoid identity theft. This means those with high incomes may still have bad credit if they fail to maintain a good score.

Let’s look further into what affects your credit score. It’s calculated based on the following factors:

  • Payment History: Regularly meeting repayment deadlines and maintaining a good score positively affects the report and helps protect a good standing.
  • Number of Accounts: This factor notes how many credit accounts you have. These include any credit product like credit cards or loans.
  • Amount Owed: This details your current debt relative to the available credit.

Though your income plays a part, what matters more is that you retain a healthy credit report through timely loan repayments. Hence, income amounts only indirectly affect the score.

Myth #4: More Debt Means A Lower Credit Score

While debt is never a good thing to have on your credit report, lenders and financial institutions don’t always focus on that when they decide whether to give you access to more lines of credit.

They generally focus on whether you manage these debts promptly and responsibly. Additionally, only the credit limit is put into the credit report, not the credit balance.

Since lending providers and banks do identity checks and access your credit data and personal credit score, they can see how often you have repaid loans and credit within your account.

These actions improve your chances to access more loans and reduce debt.

Myth #5: Defaults Stay On The Credit File Forever

Defaults occur when you miss more than one debt or credit payment, negatively affecting your credit score.

Though this does impact your credit data, the truth is that this default is removed from your credit report after five years, or seven years in case of a clear-out.

Credit reporting agencies focus more on how often you settle your defaults. If you previously had a default but have since paid it, it will show as a paid default on your credit report.

Paying off your defaults shows credit card companies and other lenders that you are actively trying to be financially stable.

Myth #6: Non-existent Or Limited Credit History Gives You A Good Credit Score

Since debt affects your score directly, it may be understandable to think that not having any history on your credit may help.

However, it does the opposite. Institutions need to know that you have been responsible when provided access to credit in the past to know whether to lend to you.

At the same time, this does not mean you have to purposefully get into debt and repay it. Simply being on a utility bill or paying off a phone bill can already show that these financial institutions can lend money to you.

It is essential to strike a healthy balance on your credit history to avoid negatively impacting your credit score.

Myth #7: Enquiries Won’t Affect Your Credit Score

When making credit applications, lenders do a hard enquiry. Too many of these enquiries will negatively affect your score.

Whether done by utility providers or requested for other loan types, these enquiries are crucial for avoiding identity theft and checking that you can manage financial products.

Every credit enquiry causes a dip in your score. It is crucial to wait a few months between requests to avoid further affecting the score.


Understanding credit score myths is crucial when analysing and improving your score. By ensuring you maintain a good credit history and repaying any outstanding loans, you should be able to get further finance for your business, provided you meet all of the lender’s criteria. 

If you need a loan to increase your business’s growth, consider contacting our experts at Lumi. We’re a leading provider of flexible business loans, which we can tailor to your business’s unique needs. 

Got more questions? Reach out to our team via phone at 1300 005 864 or email sales@lumi.com.au. If you’re ready to apply, click here

Post Author: Sally Le

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