People have some strange ideas, bigfoot, the Loch Ness Monster, Kim Kardashian being worthy of attention, but none of these are going to do you much harm, and they may even be fun, or at least entertaining. But myths about credit can be damaging, to your reports, and especially to your finances.
Here are six odd viewpoints/questions we’ve addressed in our time as credit consultants.
1. I’m not looking to get any credit cards, a mortgage, or a car, so I don’t need credit.
Credit is not just about getting loans. Just a few examples, your employer may check your score when you get hired, or any time you are employed. If you want to rent, most places worth renting from will check your score. When it does come time to get a loan, a good credit history and score (760+) will get you the best rates, saving thousands, or even tens of thousands over the course of the loan. Your FICO is important. According to a The Fair Isaac Corp’s testimony before a House Financial Services subcommittee, FICO scores are used in approximately 10 billion decisions annually.
2. I’ve got a great credit score, so I don’t need to worry about it.
You are the warrior upon the wall watching for ninja surprise negative marks. How do you avoid them? Constant vigilance! You don’t need to check your score every day, but pay your debts on time, never miss a payment, don’t rack up balances, keep an eye on your reports to make sure anything you didn’t authorize shows up.
A good FICO score is like getting in great shape. Once you achieve that beach bod, you have to maintain it.
3. I only have a credit card, I better get a car so I can show installment credit.
This is a great place to give a reminder on how credit scores are calculated.
Payment History — 35%, pay your debts on time, even if it is only the minimum
Amounts Owed — 30%, especially on your credit cards vs. how much limit you have available.
Length of History — 15%, how long your accounts have been open. Hey, age does have its benefits!
Types of Credit — 10%, variation is good, you want a mix of installment (student, auto, mortgage), revolving (credit cards)
Inquiries — 10%, too many inquiries can drastically drop your score, keep it under 6/year max if you can
Here you can see how FICO tabulates those all-important scores. It’s always good to have different types of credit, but asking for credit/debt to solely get a better score is foolish. You will shorten your history with a new account, take a hit from the inquiry, and that’s if you get approved. If you don’t, you will only cost yourself points. You need a car to get around? Buy a car. You need a place to live? Buy a home, but never because you think it will help your score.
4. I want/need some type of credit; I’ll just submit an application and see what happens.
See above for how inquiries affect credit, and take our word on this: DO NOT DO THIS. Every inquiry counts against your scores. And too many inquiries will make you seem high risk, which could prevent you from getting approvals even if you have good scores. The only time you should be applying for credit is when you need it, and when you think you have a good chance of approval.
5. I’ll keep a balance on my credit card because that helps my credit scores.
The credit bureaus usually get updated balances once a month on your debts. When this happens is usually around the statement date of your card, so if you pay off the statement balance, it will still show the balance as it takes a few days for the data to get reported.
Keeping a balance from previous statements will only do one thing, cost you $$ in interest fees. You should never pay interest unless you absolutely have to, and then only if it is of the installment variety (auto, student, mortgage). Revolving accounts (credit cards) compound daily, which makes the balances difficult to pay off.
6. I pay my rent/utilities on time, so I should have a good credit score.
This is pretty much the equivalent of “I’m thinking good thoughts, so people should like me.” One doesn’t have anything to do with the other (but still think good thoughts!). Rent and utilities are not things that get reported to the bureaus, with one exception. If you are behind, and consistently behind to the point where the landlord or utility company believes they will not get their money, they may report you to a collection agency, and this can hurt your credit.
So there you have it. Don’t fall victim to strange thoughts when credit is involved, and check back to see more myths debunked, or contact us if you have any questions.