Credit matters and it’s an important part of planning your financial future. Having good credit can help you get loans, and having bad credit can hurt you in many ways. There are many ideas out there about credit. Unfortunately, some of these ideas are just not true. Here are some common credit myths to ignore if you want better credit.
Myth One: Checking your credit hurts your score
Fact: When you check your credit, it’s called a soft inquiry. This kind of inquiry doesn’t hurt you. A hard inquiry is from a creditor, and these inquiries can lower your score. Each of the three credit bureaus can provide you with a credit report and a score (either FICO or VantageScore). You can go directly to the credit bureaus (Experian, TransUnion, Equifax) or you can go to annualcreditreport.com to get free reports from the three credit agencies. This website lets you submit a request online. Again, these annual soft credit inquiries don’t hurt you. You should always check your credit at least once a year to stay on top of your credit. If you do find errors in your credit scoring, you should take steps to resolve them. For example, a credit report can sometimes make you aware of identity theft. Make sure that even your name is listed correctly. Note any mistakes in the reporting content of each copy. If there are none, it’s also such an easy opportunity to find areas where you can improve. Reports are regularly updated. If you see the same red flags when you view reports from the bureaus, you should start making changes. Many people will ignore small things here or there, but if it’s getting worse, it’s important to stop and make a change.
Myth Two: You should never use credit cards and should instead stick to debit or prepaid cards
Fact: Using a card responsibly is perhaps the best way to establish and build your credit history. When you buy a product with a credit card and then pay off the balance, it shows you can use credit responsibly. While using credit cards is smart, you shouldn’t accept every offer you’re referred to. Only apply for cards with fair rates and without big fees. If a card has great rewards, like airline points, you still need to look carefully through the offer and make sure there is no special catch like a higher percent interest. In that case, the rewards aren’t worth it. Below the flashy offer, there are facts you must take note of.
Myth Three: You should always carry a balance on your credit card
Fact: Carrying a running balance does nothing to help your credit. If you can’t pay off the debt in full each month, you should try to pay more than the minimum payment. You’ll be saving money in the long run by paying less interest. The higher your balance, the less positive your credit checks will be. If you ever have extra cash laying around, you should be going to your credit account site to pay down your debt.
Myth Four: Closing old accounts will help
Fact: Even if you’re not using an old account, it’s still helping your overall credit score just by being there. The ratio of debt to available credit is important. Credit age is also important. If you’re going to close an account, the right choice is a newer one. An old account that is closed won’t help you.
Myth Five: The FICO score is all that matters
Fact: Different lenders use different scoring models to determine your credit worthiness. An auto loan is different from a credit card or a mortgage and they may all use different scores, based on your credit reports. Your overall finances are also important, including your income potential from employment.
Myth Six: A negative record will be removed after it’s paid
Fact: Negative records stick around for 7-10 years even if the user pays them off. After it’s paid off, it will be listed as paid on your credit report, probably in less than 30 days.
Myth Seven: Cosigning won’t affect my credit
Fact: If you cosign on a loan, this means you are liable for the debt. You should only cosign if you know the borrower will be able to manage the responsibility. If they default, your credit will suffer. Even if the borrower is responsibly making payments, though, the debt will impact your own score. Before you sign, make sure they have the ability to pay the bills. It’s a good personal policy to keep cosigning to a minimum because it is a major risk. It’s best to not have to worry about someone else’s money. Simply lending money might be smarter than cosigning, if you can afford it. Parents should not cosign for their children until the child actually has a plan to avoid taking a wrong turn. Make sure they completely follow the plan and show that they are responsible. It comes down to total trust. A missed payment hurts you both.
Myth Eight: My income and the amount of money I have saved have a big impact on my credit
Fact: The amount of income you have from your job and the amount of money you have in the bank have zero impact on your credit. That said, your income and the amount of money you have available can be used to improve your credit by paying down debt. Your access to banking matters since it is related to your ability to repay your debts. It is important to have some money reserved for retirement and other savings, but you should consider diverting some savings to pay down debt.
Myth Nine: There’s nothing I can do about my bad credit score
Fact: One of the most common myths that many people believe is that bad credit is with you for life. However, the truth is there are several specific steps you can take in order to improve your credit when it takes a hit. Once you have made the decision to make your credit better, you need to gather information. After examining all of your finance reports and credit scores from the national consumer credit reporting companies, you should be able to get a good idea of the likely problems. Your credit score is based on a number of factors including whether or not you’ve had late payments, how high your credit limit is, how high the balance is on any auto loans or credit card debt, if you have any derogatory records, your utilization of credit, your payment history, and just your overall financial health.
Take time to learn more about credit. Search on Google and read some articles, like about how federal law can affect credit. Make sure you understand everything on the reports from each bureau. Take what you learn and act. You can try asking to have a negative report removed. Look at your balances and see what it would mean to be paying more than the minimum monthly payment. It could make a large difference.
After paying all of your living expenses like rent, health and car insurance, and tax payments, you really should pay down debt rather than save. If your credit is bad, the next thing to do is apply to get help from a credit repair agency. Services like this are popular with consumers because they can do some of the hard work of credit repair for you. A trusted business can help you improve your credit. Often, consumers don’t understand their rights or the terms of their creditors. Credit repair agencies help you learn while also fixing errors they find in your data. Typically, this will help you understand why your credit is bad and what your options are. This service does cost money, so it’s not for everyone, especially for those already spending over the limit of what they can afford. Between using a credit repair agency and taking steps to improve your credit yourself, you’ll soon feel confident and much more secure about your credit, regardless of your history.