Five Common Credit Myths … Debunked!

Five Common Credit Myths
Here are five common credit myths … debunked at last!
Credit Myth #1: Requesting your own credit report will hurt your credit score.

The Reality: You can pull your own credit report every week without having your FICO score suffer. However, if a multitude of potential lenders frequently request your credit report, your score will suffer.
The credit bureaus distinguish between a “soft” inquiry—one that you initiate for the purposes of monitoring your credit—and a “hard” inquiry—one initiated by a lender for the purposes of determining whether to grant you a loan or credit card.
The former is considered responsible and will never hurt your score. But too many “hard” inquiries indicate that you might be:
1.     In financial jeopardy and looking for a way to pay your bills.
2.     Preparing for a spending spree.
Either way, your score will suffer.
Credit Myth #2: If you pay for everything in case and don’t use credit cards, your credit score will be flawless.

The Reality: One of the biggest myths is that the less credit a person has, the better his or her score will be. But it’s not true.
Having no credit can be just as bad as poor credit. If the credit scoring models don’t have information to judge a person’s behavior, they will take the safe route and assign a low FICO score to that person.
Some people want to wipe their hands clean of credit cards. They decide not to have credit cards, to pay for everything with cash. But that’s not really a good move.
For example, what happens if you have an emergency and need a loan? If you have no credit history, your FICO score will be low or possibly even non-nonexistent.
In that case, you’ll have a hard time qualifying for a loan at a low interest rate. Eventually, most people want to buy homes.
Guess what? A person without credit will only qualify for a loan at the highest interest rates – and pay thousands of extra dollars in interest over the lifetime of the mortgage!
So use credit, and use it responsibly by learning how to build your credit score.

Credit Myth #3: If you pay all of your bills on time and in full each month, you must have a perfect credit score.

The Reality: Unfortunately, the credit-scoring process doesn’t work that way. While paying your bills on time is a very important factor, only 35 percent of your credit score is based on whether you pay your bills on time.
Other key factors and their weight in influencing your credit score include:

  • The amount of money you owe (30 percent).
  • The length of time you have had credit (15 percent).
  • The type of credit you have (10 percent).
  • The number and frequency of credit inquiries (10 percent).

Even being rich can’t guarantee you a good credit score. I’ve seen people with millions of dollars in the bank have credit  scores below 720.
Credit Myth #4: There’s no difference in credit scores reported by the major credit bureaus.

The Reality: There are three different agencies (Experian, TransUnion, and Equifax) providing as many as four different types of credit scores – and they are not all the same!
Depending on who is requesting your score, each bureau will apply different formulas to calculate the score. Plus, each bureaus has different information on file – some credit card companies might only report to one or two bureaus.
All this means that your score can be different on the exact same day!

Credit Myth #5: A smart move for gaining control of your finances is to take most of your credit cards out of your wallet, cut them up with scissors, and throw them away!
The Reality: If you have too many credit card accounts, credit bureaus might think you have overextended yourself.
But getting rid of those extra credit cards could also be hazardous to your financial health. Reason: closing all those accounts might hurt you credit score.
How? By lowering your overall utilization rate and shortening the average age of your active accounts.
Instead of cutting up your credit cards, pay down the balances so they are below 30 percent of the credit limit on each.
But keep the accounts open and active. Doing so protects you from suffering lowered limits, a byproduct of inactive accounts.
Philip Tirone