Like nearly anything else that is important to do, credit building is filled with myths, misconceptions, and misinterpretations. Though most people’s hearts are in the right places, a good deal of the credit ‘advice’ that you commonly hear tossed around is just plain old wrong.
And with credit building, getting the facts right is of utmost importance. As you probably know, having a good, solid credit score is essential if you hope to ever properly function in modern day America.
A good credit score is necessary for a variety of reasons. It will help you take out loans and apply for mortgages. Plus, it will help you get better rates on both of these things. A good credit score is also required when you rent a new apartment or house and sometimes even (this is becoming increasingly more common) when applying for employment. As you can tell, you don’t want to be stuck with a poor or bad score.
In the simplest sense, your credit score is a record of your financial habits, especially concerning borrowed money. It tracks the loans you take out and the payments that you make to repay these. It also keeps a tab on your credit card debt and your credit card payments. It is basically a way for lenders to assess the risk of giving you a loan including how likely you will be to pay it back in a timely manner. If they like what they see, you get the loan. If they don’t like what they see, you don’t get the loan.
But back to those myths. There are a lot of them. The ten discussed below are a handful of the most common. Keep these in mind while building your credit and you will be in the clear. Lapse up and take one of these myths to heart in the wrong way and you might end up doing more harm than good to your credit score in the process.
Opting Out of Credit Card Offers Helps
Though it is not necessarily a harmful piece of advice, many people assume that opting out of credit card offers will mean that there will not be as many credit inquiries on their credit reports. This is, in fact, a credit building myth. These credit card offers are viewed as “soft” (an industry term) inquiries. They don’t affect your credit score in any way. Continuing to receive the offers won’t do any harm to your score just as opting out won’t help improve it at all.
However, many people don’t like to be flooded with junk mail on a continuous basis, and if you’re like many Americans, a good portion of your junk mail each month is made up of rubbish from the credit card companies. Visiting a website like OptOutPrescreen.com will allow you to remove your name from the list that credit card companies use to send out unsolicited credit card offers.
You Can Remove “Hard” Inquiries From Your Credit Report
Another credit repair myth that gets spread around quite a lot is the idea that pulling up your credit report every day and putting in for a lot of the “soft” inquiries mentioned above (along with other tactics) can actually remove “hard” (another industry term) inquiries from your credit report. Basically, hard inquiries come about when you apply for a loan or a line of credit. After doing this, the creditor in question will generally pull up your report which then produces the hard inquiry “:mark” on it. Your overall credit score then falls slightly because this action is taken to mean that you are looking at new loans because you need more credit. In a roundabout way, the credit reporting bureaus (and therefore future creditors) take this to mean that you are a larger credit risk.
Anyways, many people think that loading up on the abovementioned soft inquiries (those not initially caused by you) can cause their hard inquiry(s) to be removed off of their reports. The thinking is that when soft inquiries show up on your report, they will eventually bump the hard inquiries off and improve your credit score in the process. Unfortunately, there is not a set amount of space on your credit report for inquiries so basically you’ll just be wasting your time if you take this myth for truth and try its false advice out for yourself.
You Can Improve Your Credit Score By Closing Old Accounts
The idea that you can improve your credit score simply by closing old accounts is one of the oldest (and, unfortunately, hardest-to-kill-off) credit building myths around. In fact, closing off old accounts can even put a small dent in your credit score (although this isn’t a very common occurrence). The reason for this is that closing old accounts can actually serve to “shorten” your credit history. Eventually this might cut off your access to more credit and leave you with only a small available amount.
The best thing to do here is keep your old accounts open and focus on building positive credit experience. The older your credit history is, the more seasoned of a borrower you will appear in the eyes of creditors (especially if you have done a stellar job at keeping up with payments).
Closing Old Accounts Can Improve Your Utilization Rate
Rifting off of the false advice above, many people think that closing old accounts can improve their utilization rates. Of course, most of the people that think this also believe that they can improve their overall credit scores by closing old accounts, but many that take it to heart do it solely because they believe it will improve their utilization rates.
Simply put, it won’t. Get the dang thought out of your head. As discussed in tip number 3, the best thing to do is focus on building positive credit experience. When you have more credit available, your utilization rate will, in turn, be lower. Your utilization rate shows creditors how much of your available credit you are using. Thus it is better to have a lower percentage than a higher one.
Opening (A Lot Of) New Accounts Will Improve Your Credit Score
At the same time that many people believe that closing old accounts can improve their credit score, an equal number of people believe that opening new accounts will improve theirs. In a way this line of thinking can make a little sense. It is easy to think creditors will view your multiple accounts as proof you’re able to handle a lot of credit at once. Instead, and as you might suspect, it actually does the opposite.
When a lender checks your credit report and sees that you have a lot of new accounts open, it causes them to stop short. It causes them to wonder what exactly you need all of this credit for. To them, it is a sure sign of a credit risk. If you really need that much credit, a lender assumes that you must be doing something wrong. Furthermore, opening up a new account goes onto your report as a “hard inquiry” which is reflected negatively in your score itself.
You Can Restore Your Credit By Paying Off Delinquencies
A surprisingly large number of people believe that they can restore their credit simply by paying off their delinquencies. Yes, doing this sure will help your score but it will only do so slightly. It will not restore your credit to perfect health.
A delinquency still remains on your credit report even with a completely paid off balance. In fact, a mark of most of your delinquent payments will stay on your credit report for at least 7 years. This is true of late payments, charged-off accounts, judgments, tax liens, and collection accounts. If you are ever unfortunate enough to go through bankruptcy, your credit report can be scarred for 10 years (if it’s a Chapter 7). So, yes, you should focus on paying off your unpaid bills as soon as possible but you should also go into it knowing that it won’t completely restore your credit health. There will always (at least for 7 years) be a mark showing that you missed payment.
It Is Better To Pay Off Loans Early Than Make Payments At All
This is one of the strangest credit building myths because it just makes so much sense. It seems so logical and like it is certain to be true. But it’s not. Paying off your loans early, or all at once, won’t do very much for your credit score. Of course, it is much better for your overall personal financial health. So, if you’re not worried too much about improving your score (for instance, if it’s already top-notch), pay off your loans as soon as possible if you can. If your score needs some help, consider making the payments over the course of the term that you’ve agreed upon.
Lenders like to see that you’re currently making payments on time every time that they are due. These are called open credit accounts. They boost your score much more than simply paying off an entire loan does. Regular payments show creditors that you can be responsible over a long period of time.
Making Payments Before They Are Due Improves Your Credit Score
Once again, this is a credit building myth that makes a lot of sense. It just seems perfectly straightforward that making payments before they are due would improve your credit score. However, that’s not the case.
The reasons for this are numerous. The key one is that your credit score shows a completely up-to-date number. In fact, when you pay off a bill or credit card balance before it is due, it won’t show up on your credit report right away. It won’t help your utilization rate either. Basically, you would have to actually pay the balance in full before the closing date on your statement to get around this. Doing this would allow your payment to be reported to the agency before your credit score is updated. It would improve your utilization rate as well as your credit score.
Every Delinquency Is the Same
Yet another myth about how to build a credit score is that every delinquency is exactly the same. The idea holds that if you miss a payment, it doesn’t really matter which one you miss. It will hurt your score just the same. As mentioned, this is as big a myth as any of the others on this list! If you absolutely have to miss a payment, then you need to choose which one to miss very carefully. Each specific type of payment that you are making can hold a very different impact on your credit score if it is delinquent. For example, a missed mortgage payment or a missed auto loan payment will far more seriously affect your score than a missed credit card payment. The reason for this is that they are generally larger debts. Larger debts carry more of a bang for your credit score.
Better than missing a payment at all and running up a delinquency is keeping your accounts current. You only need to make the minimum payments to do this. Doing this will keep your credit score as high as possible. If you are having trouble making your payments, you might need to talk with a credit counseling company or set up a solid budget and expense plan (if you don’t have one already).
You Can’t Have Any Negatives On Your Report
Though everyone would obviously prefer to have a perfectly clean credit report, sometimes it is just not possible in today’s day and age. Luckily, having a negative or two (or three) on your credit report doesn’t necessarily mean that your credit score will plummet to the level that creditors consider ‘bad.’ Yes, you can have a good score with a few negatives on your report.
Most important to remember is that the most recent information on your credit report holds the most heft with lenders. When they look at your report, they want to see that you are currently making payments on time and don’t have any recent negative activity. You can even have something as scarring as a bankruptcy and still have a good score, as long as the bankruptcy happened a few years ago and your financial and credit habits have been outstanding since. This is why most credit experts agree that you should focus first on making good payment behavior a habit before you look for a quick credit fix.
There certainly are a lot of myths about credit building circulating wildly out there. It is best for everyone just to close their ears to this mistaken advice and stick to their guns. Make sure that you get your information from a reliable source and don’t hesitate to consult a credit counselor or other debt expert if you have a question about anything.
And That’s How To Build a Better Credit Score
Building a better credit score is a long-term process. There are no quick fixes. Sure, some things that you can do will improve your score more than others but just remember that making payments on time is the best thing to do of all. Chances are that falling into debt and missing payments is what brought about your woeful credit problem in the first place. Don’t let the same mistakes bite you again!