Your Credit-- Myths & Reality

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[Credit Repair]

The more credit repair clients I work with, the more countless myths and rumors I hear in regards to establishing credit, credit management, scores etc. Clients share myths with me they have believed for years about credit so it ends up clouding their judgement and assessment on how they use credit. I'll go over some and you may come across a few that you have believed for a long time to be true.

Credit Myths: 1. “I can boost my credit score by using prepaid credit cards and debit cards.”

Prepaid credit cards and debit cards are not reported to the credit bureaus, so using them doesn’t affect your credit score either way. If you are unable to obtain credit cards but want to boost your credit, use a secured credit instead. A secured credit card requires you to put up collateral to obtain the card, such as a car, boat, expensive jewelry, or an entire bank account. When you use the card responsibly, over time, your credit score increases, and then you can apply for a traditional unsecured credit card.

2. “Every time someone pulls my credit report, it decreases my credit score," Your credit score is affected depending on "who" is pulling your credit and how they pull your credit report. When you are applying for credit from a lender they will do what is known as a “hard inquiry” and it can decrease your credit score (only by a few points)

Additionally, when you apply for a type of loan (such as an auto loan) with a few different creditors, this typically counts as one inquiry if completed within a 30-day time-frame.

A "soft inquiry" is when a creditor reviews only a portion of your credit report for educational purposes. Generally, a soft inquiry is something a credit card company does before sending you a pre-approval notice in the mail. When you pull your own credit report, this also does not affect your credit score.

3. “Only certain types of unpaid bills show up on my credit report and affect my credit.” The types of debts that show up on your credit report are at the sole discretion of the creditor. If the creditor reports the paid and unpaid debts to the credit bureaus, it can be turned over to a debt collection agency can show up on your credit report.

It is true that certain creditors are known to report all paid and unpaid debts to one or more credit bureaus. Mortgage companies, credit card issuers, and even apartment complexes are some of the common types of creditors that report the state of your accounts to the credit bureaus. If you are unsure about whether a creditor or an account holder reports to the credit bureaus, simply make an inquiry.

4. “Salary, child support, alimony, and other income affects my credit score.” Income, whether individual or household, is not used to calculate your credit score. While the credit bureaus do not publish the exact formula used in credit score calculation, FICO reports the general calculation: Payment history accounts for 35% of the score, account balances make up 30%, credit history is 15%, the various forms of credit you have account for 10%, and new credit applications make up the last 10%.

You may make a lot of money, but that doesn’t necessarily mean you have good credit. Good credit is built by paying your bills on time and prudently managing your financial accounts.

5. “Since I don’t have any credit cards or credit card debt, I have a good credit score.”: Not having any credit cards does not ensure that you have a high credit score. On the contrary, having credit cards and properly managing them plays a big role in calculating your credit score. It is imperative to develop a credit history, which includes establishing credit accounts and paying off debt.

Creditors and lenders want to see that you have and can manage credit cards. When a creditor or lender sees that you do not have any credit cards, it will likely view you as a higher risk than those who have credit cards. It is wise to have at least one credit card as part of your overall financial management strategy.

These are just some myths that plague the credit world, educating yourself is the key to managing your credit and keeping it financially fit.

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