This information is provided by our friends at Pentagon Federal Credit Union (PenFed).
With so many good reasons to get a credit card, the fact is that mismanaging
your payments can leave you with a puny credit score that’s too weak to qualify
you for that big wish list item you’ve been hankering to buy.
The details of building a better credit score are notoriously intricate, but
many of the so-called rules passed down as common knowledge are actually myths
that don’t affect your creditworthiness the way you think.
Myth No. 1:
Paying off your debts will polish your credit report to a sparkling shine.
Your credit report is more like a timeline than a snapshot. Paying off debts
won’t make any past indiscretions disappear.
Myth No. 2:
Paying off credit card balances every month can actually hold down your score.
You might have heard that you
need to carry a balance on your credit card to keep it active. The truth is
that your account will be considered active even if you pay off the entire bill
every month — which of course is exactly the smartest way to use a credit card.
Myth No. 3:
Canceling credit cards boosts your credit score.
The common myth is that
creditors look at available credit on your unused credit cards as potential
debt that could hamstring your ability to pay off your debt to them, should you
happen to run up all your available credit later down the road. The truth is
that having several active credit accounts lets creditors know you are capable
of using credit responsibly.
Myth No. 4:
Closing your oldest credit card shortens your credit history.
Closed accounts in good standing
remain on your credit report for 10 years from the date closed, so you’re in no
danger of losing your current standing.
Myth No. 5:
Asking for lower credit limits can boost your credit score.
Generous credit limits are not a
negative for your credit score as long as you don’t take them as an invitation
to rack up debt. Lenders look for a wide gap between the amount of debt you’re
carrying and your available credit limits, so lowering your limits can actually
Myth No. 6:
Your credit score is the determining factor for whether or not you get credit.
Your credit score is just one of
the factors that go into a lender’s decision to extend you credit. A lender
will also consider how much debt you can reasonably take on in light of your
income, your job history and your credit history.
Myth No. 7:
Credit scores are biased against minorities.
The Equal Credit Opportunity Act (ECOA) prohibits lenders from
considering factors including gender, race, nationality and marital status when
Myth No. 8:
A lower income means a lower credit score.
Your credit score is about how
you manage your bills, not how large the totals involved are.
Myth No. 9:
A low credit score could cost you your job.
Knowing that an employer or
potential employer can review your credit report can be off-putting, but your
credit score is not a part of the material they will see.
Myth No. 10:
Credit counseling may help you pay off debt, but it will destroy your credit rating.
The mere fact that you are
working with a credit counselor will not be reported to credit bureaus and
won’t affect your credit score. However, anyone reviewing your report might
recognize signs that you’re working with a counselor, and strategies your
counselor might recommend (such as partial payments or settling debts for a
smaller amount) could definitely impact your credit score.
Myth No. 11:
Checking your credit rating will lower your score.
It’s true that multiple credit
inquiries can lower your score, but that does not occur if you’re the one doing
the inquiring. In fact, keeping tabs on your credit report and credit score is
a smart way to stay ahead of fraud and other errors.
Myth No. 12:
Applying for multiple loans in order to check rates will ding your credit
savvy enough to recognize when you’re shopping for loan rates. Beyond that,
your credit score ignores credit inquiries made in the 30 days prior to
scoring. Limit your rate shopping to a 30-day window and your score will be
Myth No. 13:
You don’t need to check your credit report if you always pay your bills on
estimate that about three-quarters of all credit reports contain erroneous
information, from missing account information to incorrect personal details.
Check your report regularly to ensure accuracy and prevent fraud.
Myth No. 14:
Divorce settlements automatically sever joint credit accounts.
While the court may have
approved your arrangements to divide loans and credit card payments, the task
of changing and removing names falls to you. Take action now to prevent a
former spouse’s problems from carrying over to your credit report.
Myth No. 15:
You can always pay a service to repair your bad credit rating.
Companies that claim to fix your
credit send letters requesting verification of negative entries on your credit
report, which are then temporarily removed while they’re being verified. At
best, the information will be verified in your favor and removed; at worst,
though, it won’t get verified and will pop right back onto your file in 30
Myth No. 16:
Credit scores are locked-in for months at a time.
Your credit score changes the
moment new data hits your credit report. In essence, your score gets
recalculated every time someone pulls your file, so it will always reflect the
most recent activity and influences.
Request a free credit report at AnnualCreditReport.com, the only site authorized by the
federal government to provide free reports. Looking for a financial benchmark
you can track yourself? Learn how to calculate your net worth.
Find more financial education articles like this one on PenFed’s