Your credit score is vital to your financial ability to get a loan. Your credit report and credit score are very important to financial success. Don't let your credit score be affected by credit myths. Keep reading for information on the most common credit myths.
You know that your credit – your financial reputation – is very important. You need good credit to get a loan, get a cell phone and even to get a job sometimes. Indeed, your credit report and your credit score are two of the most important aspects of your personal finances. This is why it is a good idea to know fact from fiction when it comes to what helps and hurts your credit.
Common credit myths
There are a few common credit myths that, if you subscribe to them, can actually set you back in terms of your credit rating. Here are some of the most common myths about credit – along with the truth:
- A large salary = good credit. While making more money can help you qualify for some credit, it does not guarantee credit. This is because lenders will measure your total capacity to pay over the long haul. And they will look at your debt as a percentage of your income. So, if you have a large salary that is mostly subject to debt obligations, you are still going to have a poor credit score.
- Paying cash can help your credit. Many people think that cash is the only way to go. If you don't use credit, you can't get into debt – leaving you with a good credit score. Unfortunately, this isn't true. A credit history and score measure how you handle credit. You have to have used credit in order to have a history. Just using cash means you have no history at all. The truth is that someone with poor credit has a better chance at a home loan than someone with no credit. Besides, you can't get through life without some sort of credit history. While you might be able to manage to buy a very inexpensive car with cash, few people have the capital necessary to buy a home with cash.
- If you always pay on time, you will have a good score. Paying on time does help your credit score. However, it is not the only consideration. Only one-third of your credit score relies on whether you pay on time. The other two-thirds can overwhelm your on-time payments. Your credit history and report also shows how much debt you have with relation to your income. If you are close to maxed out on your credit lines, and barely making your payments each month, that will count more toward dragging your score down than on-time payments will lift it up.
- The credit bureaus all show the same information. If only this were true. However, the information credit bureaus have varies, according to the reports they receive from creditors. Additionally, credit bureaus have their own scoring formulas that differ from each other – and even from the FICO score. So you may have a difference of between five and twenty points on the scores.
- Poor credit can ruin your score for seven years. This is one of the myths that is more pleasant to be wrong about. The only things that stay on your credit report for so long are bankruptcy, foreclosure, judgments, liens and a couple of other "big" things. Most of the time, you can start improving your credit in a matter of months, as long as you are reducing your debt. Most late payments and over-the-limit issues are taken off your credit report within three years.
- Divorce means that you do not have to worry about credit. This is not true at all. A judge can divvy up the responsibility, but your name may still be on the account. This means that if your ex is late or stops paying on cards or car loans or a mortgage that you have jointly, it shows up on your credit report as well.
- Debit cards can help you build good credit. This is not true at all. A debit card is like writing a check. The money is already there, and comes out of a checking account. It does not help you at all. However, there are secure credit cards that work like debit cards. These can help you build credit in some cases. Check with the issuer to see if they report regular payments to the credit bureaus.
- Your credit score will increase if you close a credit account. This is one of the most insidious of credit myths. The unfortunate truth is that when you close a credit card account, your available credit becomes lower. It you still have other cards that you are working on paying down, you could severely damage your credit score by closing one. Additionally, if you close an old account, that shortens your history, which can also damage your score. Your best move is to leave all accounts open (but get rid of the cards) until all of your cards are paid off. Then close the newest card, and the card with the lowest limit. Leave the older accounts and the card with a high limit open.
It is important to be careful about your credit, and to avoid believing myths that could actually hurt more than they help.
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