Five Common Myths about Credit and the Real Facts You Need to Know
Your credit may be considered as important as the air you breathe. While you most certainly won’t perish due to bad credit, it does affect almost every aspect of your life.
From landing your dream job to buying a home or a car, you need to be able to show a credit history that is good and solid. While we may not know where the following rumors and myths about credit may have started from, our job here at Tayne Law Group, P.C. is to make sure that our clients and our readers understand how credit works and how believing these myths could be keeping them from a healthy financial future.
Here’s how believing these common myths about credit and how they could be hurting your credit score and setting you back financially.
Closing Out Credit Cards Will Increase My Credit Score
Closing out credit card accounts could have a negative impact on your credit score. By removing credit cards, you could be shrinking your debt to available credit ratio. For example, if you have $10,000 worth of debt and $20,000 in available credit, closing a few cards may drop your available credit to $5,000 changing your debt to credit ratio. While you can most certainly close a credit card, closing too many in a short period of time is not recommended. Instead, pay off the balances on your credit cards and put them away in a secure place and don’t use them. Be sure to continue to check your statements on credit cards that remain open to check for any fraudulent activity.
Opening a New Line of Credit Will Hurt My Credit Score
Many myths about credit may seem like obvious fallacies, however, one of the most common myth is the belief that opening a new line of credit is a big setback to credit scores. Opening a new line of credit may only temporarily cause your credit score to drop a few points. If you are responsible for your new line of credit and you pay your bill on time every month, you will see a long-term positive effect.
My Income Affects My Credit Score
Your income does not affect your credit score. Your income only affects the ability to pay your bills. Your employer information is listed on your credit report, however, your income is not. Creditors and lenders look at your credit history and how responsible you are in paying your debts. Just because someone has a large amount of income doesn’t necessarily mean they are paying their bills on time or at all. Your credit score is based on how you have paid prior debts no matter how much money you make.
I Can Never Get a Loan With a Bad Credit Score
This is not always true. There are many lending entities that are willing to give loans or credit cards to people with less than perfect credit and bad credit scores. However, keep in mind that your interest rate will most likely be much higher in contrast to someone that has an excellent credit score. Also, make sure you do your homework when searching for a loan or credit card. There are many “predatory lenders” that will take advantage of individuals that have struggled with keeping good credit. These type of lenders may have repayment terms that do not benefit the borrower at all and typically put borrowers in a situation that only make it more expensive and harder to repay.
I Pay My bills on Time So I Have Good Credit
While paying bills on time definitely plays a role in having good credit, other factors are also considered. Payment history, how much debt you have as well number of credit inquiries, and types of credit are all weighted into your credit score. Any of these components can have an impact and lower your credit score regardless if you pay your bills on time.
The above myths about credit are just a few of the most common financial fallacies. You can learn more about the many other credit myths in Leslie’s book, “Life and Debt” among other tips on how to achieve financial wellness.