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Five Myths that can Harm your Credit Score

Five Myths that can Harm your Credit Score

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    The average U.S. household carries $5,700 in credit card balance, according to 2016 data by the Federal Reserve. Unfortunately, a few myths persist that misinform consumers when it comes to sound financial practices and these misperceptions can have a negative impact on your credit report. It’s important to have a good profile with the three major reporting agencies because a low credit score can increase your borrowing costs, prevent you from accessing loans, and even diminish employment opportunities.

    Here are five myths when it comes to personal credit.

    Myth No. 1: Closing your accounts will improve your score.

    This is a common myth. Nearly one-third (31 percent) of Americans surveyed think that closing unused cards is good for credit according to an Oct. 2016 Capital One Credit Confidence Study. It can actually hurt your score by lowering your overall credit availability. What improves your score is paying down your balance and meeting your current obligations. Moreover, make sure you have a low credit utilization ratio. A high ratio can inform potential creditors that you may be over your head in loans.

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    You aren’t born with a credit score. You have to build it and maintain it. It measures your financial dependability.

    The whole purpose of paying your cards properly is to show potential and/or future lenders that you’re a low-risk borrower who makes payments on time. Doing so can give you access to a low-interest mortgage or car loan. Your credit-based transactions form part of your records with the credit reporting agencies. If you only pay with cash, you won’t have any payment history to show. Cash payments do not leave electronic proof of reliability as a borrower or consumer.

    Myth No. 2: Paying a delinquent loan will remove it from your report.

    A late or missing payment, a delinquent loan, accounts in collection, and bankruptcies aren’t removed from your credit report even if you pay or settle such accounts. In other words, negative marks will remain on your credit profile for seven years. Also, some bankruptcies stay on your report for up to ten years.

    It’s more important to not fall behind in the first place than it is to fix a delinquent account. Adverse information sticks to your report for a long time, so stay current with your bills and avoid items getting reported to the credit bureaus.

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    (The article continues below.)

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      Myth No. 3: Settling your phone bill will increase your score.

      Wireless is either neutral or bad when it comes to personal finances. Paying your cellphone bill on time won’t build up your credit profile, but a delinquent payment will show up as a negative item. More than half (53 percent) of U.S. respondents incorrectly believe that paying their cellphone bill builds their credit score, according to Capital One’s study.

      If you go on vacation, pay your cellphone company ahead of time. You should exercise caution whenever you have a dispute with your provider. An inaccurate statement or a bill that incorrectly charges you for unwanted services could lead to a lengthy resolution process. During the dispute process, it’s possible that your payment could be classified as late.

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      If you have a dispute, consider paying your bill upfront and ask for a refund if the amount owed ends up being less. Alternatively, work out a plan with your wireless provider so you can avoid having a delinquent payment show up on your credit report.

      Myth No. 4: A “hard” inquiry won’t affect your score.

      Yes it can. An inquiry involving card applications, credit checks, and employment background inquiries can cause a temporary dip in your score. However, “soft” inquiries such as monitoring your credit score won’t have an adverse impact. About 27 percent of Americans incorrectly think that checking their credit report will reduce their score, according to the same Credit Confidence Study.

      There are monitoring tools and mobile apps, such as CreditWise, that allow you to check your score. There are websites that let you check your score for free once a year with Equifax, Experian, and Transunion.

      Myth No. 5: A debit card can increase your score.

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      No it won’t. A debit or check card such as those you use at groceries and gas stations are issued by your bank or credit union but they do not impact your credit report. They simply give you access to cash that you already keep in your checking or savings account. These plastic cards do not represent a credit card balance or consumer loan.

      A good credit report isn’t affected by how much money you have deposited into your bank. A credit score doesn’t measure how much paper currency you have stored. “Only by signing up for a credit card and proving that you can use it responsibly will you improve your credit score simply by paying for things,” writes Lauren Gensler at Forbes. However, if you bounce checks or have a negative balance at your bank it can be reported to credit bureaus.

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        Marvin Dumont

        Entrepreneur, Disruptor

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        Published on September 17, 2018

        How Being Smart With Your Money Leads to Financial Success

        How Being Smart With Your Money Leads to Financial Success

        Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

        With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

        So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

        1. Avoid being “penny wise but pound foolish”

        It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

        You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

        So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

        2. When you want something big, wait

        Impulsivity can get you in trouble in most aspects of life. Finances are no different.

        It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

        We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

        A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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        So, you get the itch.

        You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

        Here’s where you have to take a step back.

        Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

        Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

        It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

        The impulse faded. And you just saved yourself a ton of money.

        3. Live smaller than you can afford

        You finally get that big raise. And you want to celebrate – and why not?

        You’ve been looking forward to this forever. And after all, it was all due to your hard work.

        That’s fine, splurge a little. However, make it a one-time deal and be done.

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        Don’t get caught in the trap that just because you’re now making more money, you should spend more.

        Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

        The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

        But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

        4. Practice smart grocery shopping

        Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

        But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

        Create a grocery budget

        Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

        Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

        I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

        Make a list… and never deviate

        Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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        You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

        These impulse decisions will lead to overspending, which will derail your grocery budget.

        Eat before going grocery shopping

        It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

        If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

        After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

        Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

        However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

        This makes it much easier to stick to your grocery plan.

        5. Cancel your gym membership

        Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

        The average gym membership costs around $60 per month. That’s $720 a year.

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        Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

        I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

        Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

        Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

        For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

        Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

        There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

        It’s baby steps… And baby steps can start now!

        I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

        Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

        The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

        Featured photo credit: Unsplash via unsplash.com

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