5 Credit Myths
Article brought to you by Ollo and authored by Shannon McLay, Personal Finance Expert and Published Author.
When it comes to credit, there’s so much information out there. It’s hard to decide what is fact or fiction. Unfortunately, there are a lot of credit myths that people believe to be true. We’re here to break down the top five credit myths.
Myth #1: Bad credit can’t be rebuilt
Do you have delinquencies on your credit report, perhaps a bankruptcy, or an account in collections? If so, your credit score probably looks like it’s seen better days, and you’ll wonder if you’ll ever overcome your poor score. The good news is that bad credit doesn’t have to remain a permanent fixture of your financial picture.
If you have something negative on your credit report, the best thing to do is to begin the process of rebuilding it as soon as possible. It’s important for you to start showing lenders that you’ve learned from your mistakes or poor choices in the past.
Over a period of time, lenders will start to see beyond the negatives in your credit report, and will begin to offer you new credit again. Many lenders look at more than just the negative information in your credit report when deciding to extend you credit. As you use this new credit responsibly, your credit score may improve; and eventually, you could have a clean slate from which you can continue to rebuild your credit.
You can always rebuild your credit after a setback, you just want to make sure you start working on it as soon as possible and that you make sure you try to avoid the mistakes of your past so that you can rebuild a better future with a stronger credit profile.
Myth #2: Opening new credit hurts my credit score
New inquiries are a component of your credit score; however, they typically only factor heavily into your score for a short period of time, typically less than two years. After you apply for new credit, you will likely see a drop in your credit score; however, if you don’t apply for other types of credit for a period of time, then your score will go back up again provided everything else stays the same.
Also remember that if you are shopping around for large purchases such as a car loan, mortgage or student loan, credit scores lump all inquiries of similar a category into one, as long as you limit your rate-shopping period to 30-day window.
Myth #3: Closing credit cards is good for your score
If you’re in debt, closing your credit card may seem like a good idea. Though paying your balance down is typically good for your credit, closing a credit card account may not be good for your credit score. When you close a credit card, you are negatively impacting two possible components of your credit score: your total available credit and your credit utilization. Lowering your available credit impacts your credit utilization, which is the amount you have outstanding on your cards versus how much you have available. A lower utilization number helps your credit score and a higher available credit number makes it easier to attain a lower utilization number.
Myth #4: You should carry a balance on your credit card
Unless you can’t pay your bill or need to save your cash for some other use, it doesn’t make sense to carry a balance on your credit card, especially if your credit card company charges you a monthly interest rate based on your balances. You wouldn’t want to pay interest or fees unless you had to.
FICO® looks at your credit card usage and the balances you keep on your cards, but it doesn’t typically reward you for carrying a balance on your card.
Myth #5: A credit score determines if I get credit
Your credit score is only one component in a lender’s decision for whether or not to lend you money. The majority of lenders use FICO Scores as part of their decision-making process; however, it’s rarely ever the only factor in the decision. Lenders may also look into your salary, your employment history, your overall relationship with the lender, and your debt-to-income ratio amongst other factors.
This article is provided to you solely for education purposes. It is not intended to provide you with any specific legal, investment or financial advice and you should not solely rely upon this in making financial decisions.