Credit scores are confusing. You can pay off your student loans and see your credit score drop. You can add significant credit card debt and see your score soar. It’s no wonder there are so many misconceptions about how to build or improve credit.
Many of these credit myths are accepted as truth by a many people. Possibly even you. And they can be costly. Here some credit myths that cost you money.
Myth #1: Carrying a credit card balance will improve your credit score.
Carrying a small balance on a credit card from month to month costs you money. And it probably doesn’t affect your credit at all. But a survey found that more than 2 in 5 people think that carrying a small balance from month to month can help improve a person’s credit scores. While 1 in 5 think it can hurt it.
This myth probably has its roots in the fact that using credit is indeed better for your credit score than not using credit. But many people misunderstand what this means. Credit card issuers report your balance to the credit bureaus once a month. But they don’t necessarily do so right after your due date. As long as you’re regularly using your credit card for something you’ll get the benefit.
Carrying a balance on a credit card from month to month instead of paying it off doesn’t do anything but cost you money in interest.
Myth #2: It hurts your credit score when you check your own credit report.
Checking your credit report from TransUnion, is essential to maintaining a good credit rating. That’s why the idea that it will hurt your credit scores to check your own reports is such a dangerous myth to believe.
Credit scoring models like FICO do consider the number of times others, like lenders or creditors, pull your credit reports. Many credit checks by others are known as “hard credit inquiries”. They can potentially hurt your scores. But when you check your own credit, a “soft credit inquiry” occurs. Soft credit inquiries won’t affect your credit scores in any way.
There are many places you can access your credit reports for free.
Myth #3: Your credit only matters if you need to borrow money.
The importance of good credit isn’t limited to your ability to get a credit card, mortgage or other loan. Your credit history can affect which apartments you can rent or what kind of cell phone service you can get. It can influence the cost of car insurance and utility deposits. Your credit can even determine whether you get a job you’ve applied for.
Many people don’t know that having bad credit can impact a person’s ability to rent an apartment. They don’t know that bad credit can limit their options for cell phone service. People with bad credit often have to settle for subpar options or pay outsize deposits.
Landlords, utility companies, insurers and others check your credit. To see whether you can be trusted to pay on time and whether you can manage your debt load. Your credit report isn’t the only indicator of your financial habits and behavior. But it’s one of the easiest ways to examine them. You can access your free credit report once per year from each of the three credit-reporting bureaus.
Myth #4: Credit cards are fine as long as I make the minimum payment
An attractive feature of a credit card is the convenience of paying a small amount of your balance each month. And it is always tempting to do so. However, paying the minimum monthly amount is actually the most expensive option because it will cost you the most interest in the long term.
The higher the interest, the more you will pay; and the longer you take to pay, the higher your debt load will be. When making payments towards your credit, always pay more than the minimum amount. Not only will you save on interest, but you will pay off your balance sooner and improve your credit score.
Myth #5: I’ve never borrowed before, so my score must be great
If you have never borrowed credit before then it’s difficult for lenders to assess how reliable you are. This can negatively affect your score and the financial products you’re offered.
Myth #6: You can’t qualify for new credit cards unless you already have good credit.
Building good credit can present a chicken-and-the-egg style problem. You need good credit to qualify for new accounts, but you need well-managed accounts to build good credit. How do you find a lender that will take a chance on you when you’re new to the world of credit (or you messed up your credit in the past)?
You might indeed have trouble qualifying for a big loan or a premium credit card if you have no credit or damaged credit history. But some lenders may be willing to give you a chance.
Myth #7: There’s nothing I can do about a poor credit report and score
Every credit bureau has different criteria. But there are some practical things you can do to improve your credit information. These include making sure all your accounts are registered to the correct addresses. Paying bills on time and only keeping and opening lines of credit you need and use open.
If you’re using a financial product, like a credit card, don’t push it to the limit each month. This can be a sign of reckless spending or unbalanced finances. Use no more than 75% to make your credit use appear more measured and responsible.
Myth #8: You start out with a perfect credit score.
More than 1 in 10 people think that everyone starts out with a perfect credit score. And then their actions determine where it goes from there. In reality, you build credit from scratch. You don’t start out at zero, but you do have to work your way up to an excellent score. So it’s wise to start building credit before you need to use it.
So how do you get an excellent score? The five factors that typically make up a credit score are:
credit utilization–how much credit people are using versus how much credit people have access to
length of credit history
types of credit in use and new credit
When trying to build or improve your score, focus your attention on the first two. They tend to have the largest effect on your score.
Pay every bill on time, 100 percent of the time. If you have to be late, pay within 30 days, so it isn’t reported to the credit bureaus. And focus on paying down your consumer debt. By focusing on these things, you can work your way up to a great score.
Why It’s Important to Separate Credit Myths from Credit Facts
Good credit can be a powerful asset you can use throughout your life. It can help you qualify for financing when you need it. Secure lower interest rates, save money on insurance premiums, and even land a job. You’ll be better able to earn and keep the solid credit rating you want and need when you learn how to separate fact from fiction.
14 Day Financial Detox Challenge
A financial detox is the process of giving your wallet some room to breathe. It’s pressing reset on your spending habits. And it’s being more intentional about how you view and relate to money