Your credit can be a mysterious thing. You know that the financial decisions you make when it comes to borrowing money will have an impact on your credit score, but how does it really work and what are the real-world implications? Surely you’ve heard from friends or family, or even read something online about how your credit works, but you need to be careful because much of it is more fiction than fact.
Here are 8 common credit myths:
— You only have one credit score. Most people assume that their credit score is their credit score, period, and anybody who cares to see it will get the same number. This is not true. There are three main credit bureaus, several different types of credit scores. Whether it’s because something didn’t get reported to one bureau, or just the fact that the scoring formulas are different, you’re sure to have different scores depending on where you check.
— Checking your credit report hurts your credit score. You may have heard that credit checks can hurt your score, and there’s some truth to that. When lenders pull your credit for an application, that hard inquiry can have an impact. But personal credit checks have no impact.
— You can avoid credit problems by using only cash. It is true that if you only use cash and don’t borrow money, your lack of credit history won’t stop you from buying something. But the problems don’t stop there. If you ever need to borrow money in the future and you’ve only used cash in the past, now it will be very difficult to obtain. Using cash is fine, but showing that you’ve developed positive credit habits is good too.
— Late utility bills won’t affect your credit. It’s common to think of creditors as those who issue credit cards or lend you money, but those aren’t the only payments that can affect your credit. Something as simple as an electric bill or phone bill that doesn’t get paid on time can be reported to the credit bureaus or sent to collections. What could be a small bill that’s paid late could end up as a negative mark on your credit for years to come.
— Debit cards can help your credit. Unfortunately, they can’t. Even though they look just like a credit card, they are really just easy access to your own money, not an extension of credit. So even though you may never overdraw your account, this good behavior will not improve your credit.
— Closing accounts won’t hurt your credit score. There’s no harm in closing an old credit card you’re not using, right? Well, not so fast. Even unused accounts that are still open affect your credit score. Having an open account adds to your available amount of credit, which impacts your credit utilization ratio. Simply closing an account you don’t regularly use could in fact negatively impact your score.
— You’ll never be able to get a loan again after bankruptcy. While bankruptcy is a serious thing, it isn’t the end of the road. Yes, it will be difficult to obtain any sort of credit, especially early on, but, as time goes on and if you continue to practice good credit habits, you could be able to obtain credit going forward. It may not be the best interest rates or terms, but doors will begin to open.
— Having a lot of money in the bank improves credit. Unfortunately, money in the bank has no effect on your credit score. You could have a million dollars in the bank, but if you just have a single credit card with a $5,000 balance and it’s maxed out and you’re regularly late with payments, you’re going to have bad credit.
About the Author
A financial planner turned retirement planning specialist, Jeremy Vohwinkle has been writing about finance since 2006. He holds various FINRA licenses and has obtained the Chartered Retirement Planning Counselor designation from the College for Financial Planning.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.