Credit has its fair share of myths, legends and misinformation. Pile on top the proprietary nature of credit scores, the formulas for which are closely guarded secrets, and navigating the credit waters becomes even more confusing.
It's time to dispel some common myths about credit reports, credit scores and credit cards:
1. Pulling your credit will hurt your credit score.
When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will NOT affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score.
2. Your income is factored into your credit score.
Your salary has nothing to do with your credit report and credit score. You may earn a solid income, but that doesn’t necessarily mean you have good credit. They are separate.
3. Closing a credit card account will help your credit score.
When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (total of all balances) compared to how much credit is available to you (total of all credit limits). When you close an account, you’re lowering the amount of credit that’s available to you, which may increase your credit utilization percentage. A higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk.
4. There’s only one credit score that all creditors and lenders use to determine your credit-worthiness.
The truth is there are a lot of credit scores out there. And on top of the different credit scores that are available, there are different credit reports on which a credit score can be based.
5. If you pay all your bills on time, there’s no need to check your credit report.
It’s important to check your credit report regularly no matter what your situation to make sure the information on your credit report is accurate. Mistakes are made, inaccurate information is reported and if you’re not on top of it, your credit score may suffer.
6. Paying off a past-due account will remove that item from your credit report.
Negative information — like late payments and collections — can stay on your credit report for up to seven years from the date of the initial missed payment. Some bankruptcies can stay on your credit report for up to 10 years from the date the bankruptcy was filed.
When you pay off an account that was previously past due, your credit report will be updated to reflect that you’re current on the account. And as time goes on, the negative information will have less of an effect on your credit score. However, as the purpose of a credit report is to keep a tally of your credit history and how reliably you’ve managed your credit, that information will stay put for seven years in most cases.
7. Your checking, savings and investment accounts impact your credit score.
Checking, savings and investments do not show up on your credit report unless perhaps you are delinquent with a payment or past due on monies owed.
8. Paying cash for everything and not having any credit card debt will ensure a good credit score.
Never using credit can actually hurt your credit score. Creditors and lenders often consider people with no debt and no credit cards a higher risk than those who have credit cards and have proven that they’re able to manage their debt responsibly.
9. Small debts like library fines, unpaid parking tickets and utility bills don’t affect your credit score.
It’s not uncommon for libraries to turn over even small unpaid debts to collections agencies, which can wind up on your credit report and significantly impact your credit score. And more and more, utility companies are regularly reporting to credit bureaus.
10. Debit cards and pre-paid credit cards can help you build credit.
Because debits cards and pre-paid credit cards are essentially electronic checks and not an extension of credit, they don’t show up on your credit report. If you’re looking to build credit, using a secured or unsecured credit card responsibly is the best way to go.
Good credit is a valuable personal asset when it comes to real estate investing. You must build it up and protect it in order to maximize your borrowing power!