10 Common Credit Myths That Could Be Costing You Money

Credit reporting agencies analyze how we handle credit.

Credit reporting agencies analyze how we handle credit.

It wasn’t long ago that Fair Isaac Corp.'s model for predicting creditworthiness was shrouded in mystery. Now we know about FICO, and the credit reporting industry is the object of scrutiny and regulation. But misinformation still floats about. Relying on inaccurate information when it comes to managing credit can cost, sometimes dearly.

One Credit Report Is Enough

The three major credit reporting agencies (Experian, TransUnion, and Equifax) each use somewhat different priorities in valuing different elements of your credit history, and it’s rare that all three have the identical set of data. It’s not uncommon for there to be a spread of 50 to 100 points from the highest to the lowest. In addition, credit reports can contain errors, which addresses another common myth, “I haven’t done anything wrong, so my credit must be fine.”

I’m Only Responsible For Half of a Joint Debt

When you open a joint credit account, each borrower is responsible for all the debt. The most common example is a mortgage held by a married couple. As tenants in common, both spouses are responsible for 100 percent of the debt.

Self-checking my Credit Report Hurts my Score

When a lender checks your credit report in response to your application for credit, that’s called a hard inquiry, which temporarily lowers your score. When you check your own score, that’s a soft inquiry, which doesn’t impact your score. This relates to another myth, “Shopping around for the best deal hurts your credit score.” It’s true that lender inquiries have an impact on your score, but all lender inquiries for the same type of loan (except credit cards) made within a 14-day period don’t hurt your score.

Debit and Credit Cards Affect Credit Scores Equally

When you use a credit card, you’re borrowing money from the credit card company and promising to repay it, with interest if applicable. Use of a debit card, on the other hand, involves no credit transaction and no risk. Because there’s no credit behavior with a debit card, its use is not reflected on your credit report.

Paying the Minimum Balance is Sufficient

You need to pay at least your minimum balance, but you will owe interest on the entire unpaid balance. In addition, if your debt-to-credit ratio – that is, the portion of your total credit that you’re actually using – is high, that also hurts your credit score. If you’re prioritizing payments, the best rule of thumb is to pay the minimum due on all accounts, and then use the balance of your available funds to start paying down the credit card with the highest interest rate.

Credit Scores Increase as Your Income Increases

Your credit score is a measurement of how you use credit, not how much you earn. If you use the extra income to make certain your bills are paid on time and your debt-to-credit ratio is low (below 30 percent is a good goal), your credit scores will improve.

Credit Repair Can Instantly Fix My Report

Nothing will instantly fix a poor credit report. It is true that a credit repair agency can be successful in working with a credit reporting agency to remove inaccurate information, primarily because they have the time and patience to do so, but if your credit report includes a history of delinquencies, high debt-to-credit ratios or other negative reports, the damage will be healed only over time.

Utilities and Library Fines Don't Count

If you owe money and don’t pay it on time, your creditor is entitled to use a collection agency – and collection agencies have no qualms about reporting your debts to credit reporting agencies.

Credit Reports Drop Items After Seven Years

Most items on your credit report are supposed to time out after seven years. You should check each of your credit reports annually to ensure that items are being dropped when they reach seven years old; if they’re not being removed, it’s your responsibility to alert the credit reporting agency.

I Can Start Over With a New Credit Identity

There’s only one way to create a new credit identity, and that’s to commit fraud. This approach often involves using a stolen Social Security number, which could likely open you to charges of identity theft as well.

 

About the Author

Dale Marshall began writing for Internet clients in 2009. He specializes in topics related to the areas in which he worked for more than three decades, including finance, insurance, labor relations and human resources. Marshall earned a Bachelor of Arts in communication from the University of Connecticut.

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