9 Credit Myths That Cost People Money Every Year
Navigating the complex world of credit can feel like tiptoeing through a field of traps, all ready to set off an alarm on your financial life. There's a mountain of advice out there, some good and some, well, not so much. While aiming for financial confidence, it's crucial to separate fact from fiction. So, let’s debunk some of the most common credit myths that sneak into our lives and cost us money when we're not looking.
Myth 1: Checking Your Credit Score Lowers It
Let's start with a myth that many of us have probably heard: "Don't check your credit score too often, you'll harm it." It's as misleading as claiming that looking under the hood of your car will make it fail. Here’s how it actually works: when you check your credit score, it’s called a "soft inquiry," and it doesn't affect your score at all.
On the other hand, a "hard inquiry," which happens when a lender checks your score to approve you for a loan or credit card, may drop your score by a few points temporarily. Yet, this is only minor, and it fades over time. Keeping a close watch on your credit score through regular checks helps you spot issues early and guide your financial decisions with more confidence.
Myth 2: You Need To Carry a Balance To Build Credit
Imagine paying interest needlessly every month because you believe it helps your credit score. Holding a balance is a common misconception. To maintain a good score and demonstrate responsible credit usage, paying your credit card balance in full each month is key. What really matters is your payment history and how much of your available credit you’re using, also known as your credit utilization ratio.
A good rule of thumb? Keep your credit utilization below 30%. By doing so, you're showcasing your ability to manage credit wisely—without the unnecessary expense of interest.
Myth 3: Closing Old Accounts Helps Your Score
At first glance, it makes sense to tidy up your credit history by closing old, unused accounts. However, doing so can actually have negative consequences. Closing a long-standing account could shorten your credit history and increase your credit utilization rate, both of which could lower your score.
Credit history length accounts for about 15% of your total score. Keeping those old accounts open, even if they’re not in use, portrays you as a seasoned credit manager. Instead of closing old accounts, consider using them for small, manageable purchases periodically to keep them active.
Myth 4: Cash Is King—Credit Is Too Dangerous
Debt horror stories might make you think using cash is always the better choice, and credit is a perilous road. However, credit doesn't have to be a villain in your financial story. In fact, responsible credit use can offer significant benefits—like building credit history, earning rewards, and providing consumer protections.
The key is not to overspend but to use credit tools wisely. Pay off your balance each month, and you can enjoy benefits without the drawbacks. Credit cards, when used smartly, can extend your buying power and offer perks you simply won’t get from cash transactions.
Myth 5: You Only Have One Credit Score
Reality check: there's no single "credit score." The truth is, you have multiple scores that vary depending on the scoring model used and the information on your report at different times. The most commonly known are FICO and VantageScore, but even these have different versions and criteria.
Lenders might use one type of score over another based on their specific evaluation needs. For instance, an auto lender might favor a score that emphasizes car payment history. Knowing there isn’t just one definitive score can alleviate the stress if you're seeing numbers that aren't in sync across different platforms.
Myth 6: Paying Off a Negative Record Immediately Erases It
It's natural to think that settling a delinquent debt would clean the slate immediately, but old missteps linger on your credit report. A settled or paid negative record doesn't vanish it; it simply updates the status.
Negative marks like late payments or defaults can remain on your credit report for up to seven years. The good news is, as you build a positive credit history alongside it, the sting weakens. Over time, the newest additions to your report hold more weight than those old stumbling blocks.
Myth 7: Your Income Affects Your Credit Score
Income is a significant factor in financial health but isn’t a part of your credit score equation. Many people assume a higher salary directly results in a higher credit score, yet that’s simply not how credit scores work.
Credit scoring models calculate scores based on credit history components—like payment timeliness and credit utilization, among others—not your income. However, proving income is often a pivotal aspect when applying for credit, as lenders review it to determine repayment capability. It influences credit decisions but not the score itself.
Myth 8: Bankruptcy Ruins Your Credit Forever
No doubt, bankruptcy is a severe hit to your credit report, but it isn’t a life sentence. While the impact is profound, recovery is possible with time and effort. Bankruptcy stays on your credit report for seven to ten years, depending on whether it’s Chapter 13 or Chapter 7. But, as years pass, its impact reduces, especially when new, positive credit behavior dominates your report.
Taking small, purposeful steps, like ensuring timely payments and keeping credit utilization low, can steadily rebuild your credit. Many people find their scores improving long before the bankruptcy mark ages off their report.
Myth 9: Credit Repair Companies Are Always Worth It
In a world where convenience is often king, it’s tempting to turn to credit repair companies when you're in a bind. These companies promise to resolve credit issues, but at a cost that may not always be warranted.
Truthfully, there's nothing a credit repair company can do that you can't do yourself. Many issues, like disputing errors on your credit report, are straightforward and cost nothing directly through the credit bureaus. Educating yourself and taking proactive steps may be more empowering and definitely more cost-effective than relying on potentially costly services.
The Money Notes
- Regular Check, No Wreck: Regularly checking your credit score won't hurt it, and it helps catch issues early.
- Interest Isn’t Your Friend: You don't need to carry a balance to build credit—pay off your cards each month.
- Oldies but Goodies: Keep old accounts open to build a robust credit history.
- DIY Repair Wins: Manage your credit repair independently before turning to companies.
- Stay Active and Informed: Being proactive and informed in credit management can save money and heartache.
Closing Thought: The Road to Credit Mastery
Breaking down these myths isn't just about saving some cash, though that's a valuable outcome—it's about fostering a healthier relationship with credit and money management. Building confidence in your credit practices can truly set you on the path of financial freedom and preparedness. Remember, every credit decision is a brick in the foundation of your financial future. So, take a confident step towards demolishing myths with knowledge and embracing a credit journey that supports your goals.
