The Truth About Credit Myths: Debunking Misinformation

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Nobody wants to be stuck in a situation of bad credit, however oftentimes what stands between good credit and bad is misinformation. Credit myths can lead us down the wrong path in our journey to financial security. What counts as “good” advice? Where do you find accurate information that won’t leave your finances worse off than before? In this blog post, we’ll uncover some of the most common myths about credit and separate fact from fiction. In the end, you can benefit from a better understanding of how your decisions today will impact your ability to get loans in the future. So let’s dive into these “Good, Bad, and Ugly” credit myths!

Credit Myths – What are they and why should you care about them

With credit playing such a significant role in our financial lives, it’s no surprise that several myths and misconceptions have emerged over the years, especially through social media platforms. These credit myths can be quite harmful, often leading people down a dangerous financial path. Whether it’s the belief that checking your credit report can harm your credit score or that closing a credit card will automatically improve your credit, it’s essential to understand what these common myths are and, more importantly, why they are wrong. Knowing the truth about credit myths can help you make better financial decisions and protect your credit score in the long run.

Credit Myth #1: “All types of debt are equal.”

Some debts are worse than others. For instance, a $25,000 debt on your credit report might be either good or bad. Maxing out credit cards to buy a dream car results in bad debt with high-interest rates and causes stress. However, if the debt is from a mortgage, you are just like millions of responsible homeowners. The mortgage debt brings you a warm place to live every night.

credit myth about managing debt
Managing debt is vital to preventing a personal debt crisis

Credit Myth #2: “If you check your credit report, your score may be negatively affected.”

Whenever anyone, including yourself, views your credit report, a record called a “hard inquiry” is added to it. It’s said that inquiries can have a negative impact on your credit score, but this isn’t entirely true. Your credit score is affected by an inquiry only when it is related to a credit application you have made. Applying for a loan or a credit card can lower your score because it implies that you will be taking on more debt. However, viewing your credit report as a consumer pull does not affect your score, and in fact, it demonstrates responsible credit management, although it does not earn you any points.

Credit Myth #3: “Closing a credit card will help your score.”

Closing a credit card account that you don’t use is not likely to improve your credit score. In fact, it may even lower your score because credit scoring models look at your credit usage ratio, not how much credit you have available. This ratio compares how much credit you’re using to how much credit you have available. If you close an unused account, your total available credit decreases, so your credit usage ratio goes up. However, if keeping the unused account makes you want to spend more than you can afford, it may be better to close it in the long run.

Credit Myth #4: “There is only ONE single credit score.”

There are over a thousand credit scoring models used in the credit marketplace, which means that a consumer may have many different credit scores. Lenders and others check your credit score for various reasons, as each formula considers your credit history differently and places different importance on specific factors. For instance, there are education-specific scores and industry-specific scores used by FICO.

credit myths about one credit score that is universal
There are more than 1000+ different types of credit scores used today

Credit Myth #5: “The Credit Bureaus provide scores that are either ‘good’ or ‘bad’.”

The main role of credit bureaus is to gather data about your debts and use it to calculate your credit score, which is not inherently “good” or “bad.” Rather, it represents your level of financial risk. Lenders are the ones who determine whether a score is sufficient for them to grant you credit, and they take into account other factors beyond just the score, such as your employment status and assets. So even if you have a “good” score, it may not matter if you lack a job or assets, and conversely, a “bad” score may be outweighed by a high income or valuable possessions.

Credit Myth #6: “Demographics are taken into account when calculating your Credit Score.”

Credit reports do not include information on demographic factors such as race, national origin, religion, profession, disabilities, sexual orientation, or military veteran status. They also do not mention your bank balance or retirement account balance. Any information that is not on your credit report will not impact your credit score.

Credit Myth #7: “Paying collections deletes the credit reporting from your credit reports.”

Even after paying off a collection, it can still stay on your credit report for several years. If you have been responsible for your debts and made timely and full payments, it is beneficial to keep these accounts on your credit report as evidence of your good credit practices. However, if you have a history of late payments, missed payments, or defaults, it can negatively impact your credit report for up to seven years. In some cases, bankruptcy can stay on your report for up to 10 years.

credit myths about removing paid collections from credit reports
FCRA Fair Credit Reporting Act allows for paid collections to remain on consumer credit reports for 7 years

Myths and Realities Surrounding Credit Scores: Understanding the Factors That Affect Your Score and How to Manage it Responsibly

Knowing the facts about credit scores and how they are calculated is essential for making responsible financial decisions. It’s important to understand that your score can be affected by a variety of factors, such as payment history, the amount owed on accounts, length of credit history, types of credit used, and recent inquiries into your report. By understanding these myths and realities surrounding credit scores you will have more control over managing yours responsibly. With good habits in place, it’s possible to improve or maintain a healthy score even with limited resources available. Ultimately knowing this process is key to achieving success when it comes to building up a strong financial future for yourself.

It’s important to note that credit scores are a tool and not an end-all-be-all. They don’t tell the full story, so it’s still important to research lenders and make sure they’re reputable when taking out a loan or opening a new line of credit. Even if you have an excellent score, if the terms of the loan don’t fit your budget or make it hard for you to make the payments on time, it may be better to close it in the long run. It’s also important to stay up-to-date with any changes to credit laws and regulations so that you can best protect yourself against unfair practices by lenders Finally, it’s important to remember that credit scores are only a snapshot of your financial life at any given moment and with the right habits, you can improve them over time.

By keeping all of these factors in mind, you can make sure that your credit score is working for you. With responsible practices and proper education, you can ensure that your score is as accurate as possible and use it to your advantage. With the right habits and a little knowledge, you can have peace of mind when it comes to your credit score.