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
Many so-called experts say that if you want to build credit, you should adopt a cash-only policy. But here’s the truth …
They are dead wrong.
Avoiding credit won’t make life easier. In fact, it will make life a heck of a lot harder.
If you adopt a cash-only policy, you won’t be able to build credit. In fact, you’ll end up with no credit. And no credit is just as bad as poor credit.
You see, the credit-scoring bureaus want to see that you can responsibly handle many different types of credit before they award you a good credit score. If you don’t accumulate a proven track record, you won’t get a good credit score.
This is why I always say that having no credit score is just as bad as having a poor credit score.
No credit score means …
- You’ll have a hard time getting great insurance premium rates.
- You might be unable to find a job.
- Landlords might not want to rent to you.
And if you ever need a loan (and you probably will!), you will get lousy terms and pay an arm-and-a-leg in interest.
Most likely, the banks are spreading vicious rumors!
Here’s the cold-hard truth …
The banks have intentionally kept consumers in the dark about credit scoring.
The banks fare better if your score is lousy. Simply put, the lower your credit score, the more you will pay in interest.
But what if you learned all the secrets and beat the banks at their own game?
Click here for an article I wrote about the biggest misconceptions of credit scoring. And feel free to pass the article on.
Oh, one last thing. Here’s a pop quiz …
Is the following statement true or false?
“If you shut down some of your credit card accounts, your score will go down.” Click here to read the full answer.
When you’re in over your head or you’ve had a bad experience with something, your natural reaction is pretty much always going to be to steer clear of the cause for some time. With credit, this typically means cutting up credit cards and closing credit accounts. Unfortunately, when it comes to your credit score, this is one of the worst knee-jerk reactions you can have. On the surface, getting rid of your accounts makes a lot of sense. You’re having debt issues, so get rid of the source of the problem and your credit problems will start to disappear. The little known fact is that this can actually make your credit issues even worse.
Let’s look at this a little closer. Fifteen percent of your credit score is derived from the age of your credit cards, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
Another factor to consider is your recent credit history. The credit bureaus base their evaluation of your credit worthiness on your account activity. If you close your accounts, there’s no activity for them to evaluate. This can result in a lowered score because they have no current data to determine whether you are a responsible borrower.
In addition to your account activity and age of your credit cards, your credit score is also affected by your overall utilization rate. Your utilization rate is your percentage of debt compared to your credit limit. Credit bureaus reward consumers who keep their utilization rate below 30 percent. If you close an account, there’s a good chance your rate will go up and can directly affect your credit score.
If you are having issues with paying a card, some options you might want to consider include transferring some of the debt evenly across other cards so you keep your utilization rates below 30% on all cards. If you’re not able to do that, start reducing your debt and making your way to the 30% utilization rate by making regular monthly payments. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. You’ll want to pay special attention to the oldest accounts with the highest limits and lowest interest rates.
Similar to the belief that no credit equals good credit, having lower limits can actually be extremely harmful to your credit score. To understand how this works you need to understand utilization rates, or what we call the 30% rule. Credit bureaus look to see that you are maintaining less than 30% of your credit limit at all times. If you go over the 30% marker, you are considered to be living above your means and this will be reflected in your credit score.
The problem with lower limit credit cards is that it is far too easy to go over the 30% rule. If you only have a $250 credit limit, you can never have a balance of over $75 without creating a negative reaction to your credit score. In addition, many credit card companies report your credit limit lower erroneously. Meaning you may be right under $75 each month, but your credit limit is being reported at $200 instead, putting you over the 30% limit.
In some cases, when you’re rebuilding your credit you may have to work with these lower balances. This will take careful planning to avoid any issues with errors. However, if you have higher balances, you do not want to ask for your rates to be lowered. You can never have “too much available credit.”
The best way to make sure you don’t go over the 30% rule is to use auto payments. You’ll want to schedule a monthly payment for a bill such as a gym membership or other monthly payment you need to make to be taken directly from your credit card. Then, from your bank account, schedule another auto payment to pay the credit card for the same amount.
This may sound like taking a few extra steps, but it keeps your accounts active and you can control exactly what spending is happening on your cards so you don’t go over the 30% limit.
To learn all all the facts on your credit score, get the book that will walk you through the 7 steps to a 720 credit score.
Everyone seems to have a different viewpoint on what affects your credit score and what doesn’t. Some of this is because the credit bureaus do not let their formula for computing credit scores become well known, while even more of it is due to companies or people trying to make money off of the misinformed. If you have questions about your credit, you’ll find these facts about your credit score interesting and informative.
80% of people have errors on their credit report. It’s important to check through your credit report to ensure everything is being reported accurately. If you haven’t done so, before making any changes to your credit you should always get your credit report to know where you stand.
Pulling your own credit report will NOT hurt your credit score. It’s true that credit inquiries count for ten percent of your credit score. However, you will never hurt your credit score by pulling your own credit report. You could pull it once a day for a year and your score would not be hurt.
You have more than one credit score. In fact you have three. Most lenders consider scores from the three major credit bureaus (TransUnion, Equifax, and Experian). Lenders will use the middle of the three scores in determining your credit worthiness. Because of this, you should monitor your report from each of the three bureaus.
Your credit score can affect your employability. 60 percent of employers check an applicant’s credit report at least some of the time.
Your salary doesn’t affect your credit score. You could be a housewife with no income or a millionaire. All that matters to the credit agencies is how responsible you are with the money you are borrowing, not how much of it you have or don’t have.
Late payments hurt your score, but your immediate credit history carries more weight. The credit-scoring models assume that your current behavior is a far more important indicator of your creditworthiness than your past behavior. Your current behavior, after all, can better forecast whether you are experiencing a downward financial turn. So while you may have an account in collection for over a year, a late payment on your mortgage this month will be more damaging.
Most of the time, late payments made before 30 days past due are not considered “past due” by the credit bureaus. While you will still incur a late payment fee from your creditor, most creditors will not report a late payment to the credit bureaus until you have gone past the 30 day billing cycle.
When applying for a loan as a couple, the lower of the two scores is used. This means that whoever’s FICO score is lowest will determine the interest rates on a mortgage for the couple.
Always use the same first, middle and last name when applying for credit. You may not think a small thing such as your middle initial can cause significant issues on your credit report, but it’s true. If your name is Robert Michael Jones, Jr., you shouldn’t apply as Bob M. Jones, Jr., or any of the other variations of your name. Pick one name and stick with it, or risk having your credit information divided among the various names. Worse yet, it could be merged with another person’s information. (For instance, if you are Robert Michael Jones, Jr., and your father is Robert Michael Jones, the credit bureaus might combine your files if you do not use “Jr.” when applying for credit.) That said, if you changed your last name upon marrying, start applying for credit under your new name. It might increase the likelihood of errors, but the damage will be temporary; the new last name is forever.
Your collection account history doesn’t stay on your report forever. Collection accounts only minimally hurt your credit after two years, and after four years, the damage is all but erased. After seven years, a collection account is wiped from your report.
There are credit cards for people with bad credit. If you have poor credit, you might not qualify for traditional credit card accounts. Instead, open a secured credit card. A secured credit card requires you to pay a deposit equal to or greater than the balance. Obviously secured credit cards do not come with the same privileges as regular credit cards, which allow you to buy now, pay later. With secured credit cards, you basically pay now, buy later, and then pay again. It might not sound like a great deal, but it will help you rebuild your credit so long as the credit card company reports to all three major credit bureaus—be sure to ask! After six to 12 months of timely payments, ask the company if it will refund your deposit and transform your secured credit card into a regular credit card.
Technology can help keep you in good standing. If you struggle to pay your bills on time because you are too busy, or because you do not manage your money well, try this: Sit down with a calendar and a copy of all your regular bills. Then create automatic payments on all your credit cards, mortgages, installment loans, and finance accounts. If you are a compulsive spender, this might help curb unnecessary expenditures by forcing you to pay the required bills each month.
Credit-Scoring Myth #1: If I avoid credit, I’ll have a great score.
Fact: Though shunning credit cards and loans might sound like a good idea, going down this path will make your life harder, not easier. Credit scoring systems want to see that you can responsibly handle many different types of credit before they award you a good credit score. If you don’t accumulate a proven track record, you won’t get a good score. And I always say that no credit score is as bad as a poor credit score. Credit companies will be unlikely to advance you a loan, and a bad credit score may prevent you from getting a job or landing an apartment.
Credit-Scoring Myth #2: As soon as I shut down some of my credit card accounts, my score will go up.
Fact: In this case, rather than causing your score to rise, your credit score may drop sharply. Fifteen percent of your credit score is affected by the length of time you’ve had credit. To reach this figure, credit-scoring bureaus take the average age of all of your credit accounts. Canceling several of them could cause your credit score to plummet. A better bet is to pay off the balances on your credit cards.
Credit-Scoring Myth #3: I must retain a balance or else I won’t have a good credit score.
Fact: Unfortunately, this myth has caused many consumers to spend money for no other reason than to preserve a balance on their credit cards, which actually has no effect on a credit score. Credit-scoring bureaus value activity on cards, but they do not add any value to keeping a balance. If you retain a balance, you will accrue interest on the balance, and your utilization rate might increase about 30 percent.
Credit-Scoring Myth #4: I’ve just experienced a bankruptcy, foreclosure, or tax lien and had bills turned over for collection. There’s no way I can get credit.
Fact: The facts of bankruptcy, foreclosure, tax lien, or collections notice on your credit report will have a very negative effect on your credit score, but if you take the proper steps to learn how to improve your credit score after a financial disaster, your score could increase to 720 in two years. As well, some lenders cater to people with bad credit, although you’ll probably have to deal with a high interest rate.
Credit-Scoring Myth #5: As long as I pay my credit card bill in full and on time each month, my credit will be perfect.
Fact: This is a popular myth, but paying your bills on time is only part of the story. You’ll have to add a diverse mix of credit and show that you can responsibly manage several active accounts to fully maximize your credit score.
Credit-Scoring Myth #6: My credit score will increase by paying any account in collection.
Fact: This is not a sure thing. More often than not, your credit score will decrease if you pay a collections account, especially since it will extend the time the account stays on your credit report.
If you want to learn more about the credit-scoring myths, be sure to attend the next teleseminar!