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For many people, the media and social relationships are their source of knowledge when it comes to credit scores. Sadly, the information you get from these resources are usually false. Here are 10 popular myths about credit scores.
Myth #1: Bad Credit Lasts
Have you made a habit of paying late? Do you constantly max out your cards? How many bills have you let be sent to collections? Doing any of these will hurt your credit score. Not doing these things improves your credit score, as well as remembering to manage your credit smartly.
Myth #2:All Debt Is Bad
One of my friends used a credit card to pay for a $3,000 flat-screen TV. He maxed out his credit card. That means he’s in bad debt – on top of having a mortgage. If he had used that $3,000 on his mortgage, he’d be in line for using debt positively. Debt that is used to pay off mortgages (or is used in loans) is a form of using debt wisely.
Myth #3:Credit Score Without a Card
A whopping 10% of your score is a result of a mix of credit. This means that several different types of credit accounts, with different balances, affects your score. Another 30% of your score accounts for the amounts you owe – resulting in how much credit you have available.
Myth #4:Debit Cards
Applying for a debit card won’t help your score. Considering that debit cards and credit cards are not interchangeable and have absolutely nothing to do with each other. Debit history plays no factor into credit scores.
Myth #5:Can’t Get a Card
You can build a credit score without a card. You can apply for one (or a loan) with a co-signer. This account must be opened for six months or more (and reported to a credit bureau) in order for you to have a FICO credit score. Only then will your credit score increase. You could alternatively buy Tradelines to increase your credit score easily.
Myth #6:Don’t Check Your Score
The act of someone looking into your file is called an inquiry. It’s a misconception that inquiries negatively affect your score. Your score takes a hit only when you submit a credit application. Your score takes no hit when you merely want to check your report.
By law, employers are not permitted to screen job applicants based on their credit score. This myth exists because it’s easy to confuse credit scores and credit reports, which are two entirely things. However, employers are legally allowed to review your credit report.
Myth #8:You Have One Score
FICO scores are created by three major bureaus: TransUnion, Experian and Equifax. This doesn’t include industry-specific credit scores. There are a variety of FICO scores that lenders could look at (more than 20).
Myth #9:Always Close Your Card
You have a credit card you haven’t used. It might make sense to close that card. Unfortunately, you will actually lower your credit score. This is because credit-scoring models measure how much credit you’re actually using.
Myth #10:Seven Years
While it’s true that this negative info is available to see on your report for a period of up to seven years, the older it is, the less of an impact it has on your score. If you keep a reasonable level of debt, negative information on your score will be more balanced.
People often muddle the facts pertaining to credit cards and credit scores. For even more information, talk to a certified financial planner. There is no excuse for not educating yourself about all the possibilities concerning credit scores.
Ryan Yarbrough is a small business consultant, speaker, and the manager at Davis Financial Services, a small business consulting firm.