Believe it or not, misinformation about your credit might not only be ruining your good credit score, it could also be costing you extra money. Nobody wants to pay a creditor more than they have to – that’s why low interest rate offers are so attractive. What can you do to put a stop to needless fees and interest hikes?
For starters, you need to understand the main credit score myths in circulation and stop believing the lies.
Then you’ll know exactly how to handle your credit and actively work at improving your score because after all,
a higher score never hurt!
Paying Off Credit Cards and Closing the Accounts Will Help Your Credit Score
If you have been burned by compounding interest in the past, maybe you are swinging the pendulum in the other direction. You are so sick of paying so much money in credit card interest that you are on a mission: pay off every single card and close them down so the lenders can’t get their fingers in you ever again.
This approach, while it might satisfy your need to crush credit card debt with an iron fist, is only half effective. Yes, lots of credit card debt is bad, but even if you are committing to a life without credit card use in your day-to-day purchases, you still need a good credit score for the future. What if you want to buy a home or you suddenly need to partially finance a new vehicle? You will be stuck with a high interest rate all over again, but this time the interest will be much more serious a threat to your finances than your shopping splurge you charged to a store card. The larger the loan, the more imperative it is that you have a good credit score, or else you can spend thousands over the course of your lifetime on unnecessary fees and interest, making some homes or cars completely out of reach of your budget. “But I don’t have credit card debt anymore! Why is my credit score so bad?” If you didn’t take the time to
make sure you didn’t accidentally damage your credit when waging your war on credit card debt, you’re crippling yourself rather than helping yourself.
Want to know why? Paying off a credit card balance is good. It’s ideal. You don’t want to carry credit card debt from month to month, that’s for sure. But closing the account? That’s going a bit too far. The reason is that lenders look closely at your credit utilization ratio.
The credit utilization ratio is the amount of credit you use in proportion to the amount of credit you COULD use. How much credit are you approved for? If you are initially approved for two $5,000 credit lines or $10,000 total and you keep your balance below $3,300 or 30%, lenders view you as a responsible, practiced borrower and you get positive credit score points in the credit utilization category. But if you suddenly close one of these credit lines,
your balance is suddenly over 50% of your total credit availability. That’s not a good sign. If you pay off your balance and close all credit lines, you might have more peace of mind knowing you simply aren’t able to rack up anymore debt, but after 10 years your previous records will not reflect all the on-time payments you made on those accounts. The longevity of your open credit lines count towards your score as well, so you are harming your good credit score in two areas by eliminating your open credit cards.
When constructing your credit card debt payoff plan, you can definitely focus on paying off the whole balance, but don’t go overboard and close all of your credit lines. Place all of your credit cards in a safe and do not carry them around with you. This can help you avoid the temptation of spending money you don’t have. If you find credit card debt is a serious problem for you and your personality type, you may find debt counseling is helpful. You can reexamine your priorities and learn more about the true purpose of credit cards, which does not include ruining your present and future financial health.
Getting Married Helps Your Credit Score
Many people believe that once they tie the knot, their bad credit meshes with their new spouse’s good credit and all is well – lenders will look at an average of both scores when making any credit-based decision. This is completely false. Marriage affects many areas of your finances such as your tax filing status, but it does not affect your credit. Your credit is tied to your Social Security number and yours only. If you and your spouse decide to apply for a mortgage together, you both will have to put down your personal information and lenders won’t ignore your
bad credit simply because your spouse has a better score. You will have to account for your bad credit no matter what. What if your spouse passes away or you decide to part ways? Prepare for any life circumstance by taking responsibility for your own credit score and actively work at turning it into a good credit score if it currently is categorized as poor.
While we’re on the subject, there are a number of other factors that DO NOT affect your credit. What are they?
- Your age
- Your race
- Your gender
- Your religion
Absolutely nothing affects your credit score besides your payment history, your credit utilization ratio, the length of time you’ve had your accounts open, the type of credit you have and how many inquiries you’ve made in the recent past for new credit lines. That’s it. Another common misconception is that the amount of money you make is a factor in determining your score. This is also false. While having a steady income helps you pay your bills on time and can be used as the basis for companies approving you for additional credit, loans or mortgages, your income amount does not directly affect your total score.
Paying Off a Delinquent Loan Erases it from My Credit Report
Wouldn’t it be nice if credit bureaus would simply forgive and forget when you make a late payment or default on a loan due to trying financial circumstances? Sadly, this is not the case. First, make sure you pay the delinquency, collections bill or any other debt that is overdue right away and close it as soon as possible. Delinquent loans don’t just damage your credit. You may have your wages garnished or your tax refunds withheld. It’s ideal to pay off these bills right away to avoid additional fees as well.
But be prepared – that won’t be the end of the trouble it causes you. Delinquent loans do not simply disappear into thin air. Any type of late payments stay on your record for 7 years. Collections records will stay on your account
for 7 years as well, along with any public debts like tax liens. If you have experienced a foreclosure, this has a 7-year-long waiting period as well before it will be erased. Chapter 13 bankruptcies last for 7 years and Chapter 7 bankruptcies last for 10 years.
An important characteristic about delinquency that you should note is that time passing by definitely helps the records to have less of an effect on your score. A bankruptcy that is on your record from 5 years in the past is not going to be as telling as if you filed only 6 months ago, at least in the eyes of any creditors. Don’t let this information stop you from paying off the delinquent loans in your name – just be aware that they don’t disappear as easily as you might like after the fact. You can help reestablish good credit after a delinquency by paying your remaining credit debts on time with consistency.
Carrying Revolving Debt from Month to Month Improves My Credit Score
If any financial guru tells you to charge a balance to your credit card and only pay the minimum from month to month in an effort to help your credit score, run in the other direction. This advice proves they are not the financial guru they say they are. There is no difference between paying off your credit card balance in full and paying the minimum each month when it comes to your credit score, but it will make a huge difference to your wallet. If you carry debt from month to month, you don’t get any additional credit score points, but you do incur a high amount of interest that will compound and perhaps hurt you in the long run if you can no longer afford to pay off the balance and it begins to take up a high percentage of your credit utilization ratio.
It’s not good to let your credit cards go unused for long periods of time. When there’s nothing to report, your score is going to dip slightly. So break out the credit card every once in awhile to pay for groceries or gas, as long as you have the money to pay the balance off completely by the end of the statement period. That way, you’ll get credit for the purchase but you won’t be paying any interest on the charge.
In fact, that’s how you should approach credit cards in all situations if you want to avoid backsliding into unwanted debt – only charge what you can already afford.
Checking Your Credit Damages Your Score
So many people fall prey to the falsehood that checking their own credit score will make it drop, so they live in ignorance of their current credit standing and leave their credit profile up to chance. This is decidedly not the preferred way to handle your credit. If you don’t know where your credit could use improvement, how can you take effective action?
Contrary to what many believe, there is a difference between a soft and a hard credit inquiry. Hard credit inquiries are usually instigated by companies that are seriously considering you for a loan or credit line. No one can make a hard inquiry on your credit report without your permission. Hard inquiries are the type that stay on your report – they can last for about 2 years.
Soft inquiries do not stay on your credit report – they are not even entered on your credit report. Credit card companies may initiate soft credit inquiries in order to pre-approve you for certain offers and promotions. You can also check your own credit report using a variety of free services and it is always considered a soft inquiry. In other words, any time you check your own credit, it will not hurt your good credit score in the least.
Some types of credit inquiries are difficult to categorize. You may not know if a company or individual is initiating a hard or soft inquiry? Ask the institution before approving any transaction to make sure. Some examples include when you apply for a cell phone contract, consent to a credit check before you are approved for an apartment lease, or apply to rent a car. Make sure you know whether it’s a soft or hard inquiry in order to protect your credit from unnecessary damage.
If you have been operating under the impression that these myths are truths, you could be losing hundreds or even thousands of dollars every year since you are probably paying much more than you should in interest. There are so many benefits of a good credit score, including easy mortgage approval, low interest car financing, lower car insurance rates, no required security deposits or down payments for large purchases or utility accounts, attractive credit card rewards and cash back offers and more. Start working to improve your credit today now that these 5 credit score myths have been debunked.