Myths, misconceptions, mistaken belief about credit abound but knowing the truth is worth it if you want to keep your personal credit history and credit score in good shape. In this article, we take a look at common credit myths and talk about the truth behind each myth.
MYTH #1 : You can’t have a bad credit score if you are financially responsible.
This is not necessarily true. Some behaviors which might seem like a good strategy to manage your finances can be bad for your credit. For example, not using a credit card at all will not help you in building your credit score. To build a solid credit score, you must prove your capability to handle debt and credit. Thus, not having any debt at all may seem like a safe way to avoid debt problems but you won’t have a strong credit history.
MYTH #2: Having a high credit score will automatically get you approved for a credit card or loan.
If you haven’t taken the time to build your credit report up, you can have what we call shallow credit. Meaning you only have 1 or 2 lines of credit that you pay on regularly but the two lines just don’t give a creditor enough information about how you handle credit. As a banking professional, I’ve asked people with shallow credit to either find a co-signer or declined the loan request outright. EVEN WHEN THEY HAVE A CREDIT SCORE IN THE 700s!
MYTH #3: A lower credit limit is better because it discourages overspending.
In line with the first myth, this is an example of a behavior which might seem like good for your finances but bad for your credit. 30% of your credit score is based on credit utilization. Ideally, you should have a low credit-to-debt ratio to keep your credit score in good standing. However, if you have a low credit limits,
a) You won’t have comparable credit. Meaning even with your 700+ score. Your 1 or 2 credit cards with limits of $500 – $1000 won’t qualify you for a large line of credit. When someone comes to our bank and ask for a line of credit of $10,000, we like to see that they have financed $10,000 in the past and how they paid. We like to see at the very least a years worth of payment history.
b) low limits mean that your debt ratio can be inflated. Its fairly easy to use more than 30% of your credit line when your credit limit is $500! A higher credit limit will be an advantage as long as you know how to use it in control.
MYTH #4: Checking your credit will pull down your score.
Not true! Hard inquiries or inquiries made creditors in response to your application can affect your score. However, checking your own credit will not hurt your score at all. In fact, consumers are advised to check their credit regularly to make sure that all information contained in their report is accurate.
MYTH: Carrying a credit card balance improves your credit score.
This myth came about because it was a common way to get the banks to increase your credit limit. The thought process was, if you leave a balance on your account month after month, stay near your credit limit, paying the interest on your monthly balance, would make the banks look more favorable upon your request for a bigger line of credit.
This is a dangerous myth to believe in because it encourages credit cardholders to leave balances unpaid, increasing the risk of debt build-up. The reality is that carrying a balance from month to month will not boost your credit score. The only thing it does to a card holder is make you pay additional interest rate charges. Nor will it necessarily make the banks want to give you a bigger credit line. The best way to manage credit card debt is pay your monthly balance in full, leaving no balance at all.
MYTH: All you need is a credit card or credit cards to build credit.
Aside from revolving credit, managing different types of credit in your name is a great way to prove credit-worthiness. You do not need to own multiple credit cards to raise your score. One or two credit cards should be enough, depending on your needs and lifestyle.
The types of credit used makes up 10% of the FICO score. Therefore, having at least one or two types of loans (car loan, personal loan, or mortgage) in your name will strengthen your credit history and credit score, assuming that you are consistent in making your monthly payments on time.