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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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        Last Updated on September 2, 2020

        How to Set Financial Goals and Actually Meet Them

        How to Set Financial Goals and Actually Meet Them

        Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

        In this article, we will explore ways to set financial goals and actually meet them with ease.

        4 Steps to Setting Financial Goals

        Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

        1. Be Clear About the Objectives

        Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

        It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

        Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

        2. Keep Goals Realistic

        It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

        It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

        3. Account for Inflation

        Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

        Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

        For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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        4. Short Term Vs Long Term

        Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

        As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

        By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

        How to Achieve Your Financial Goals

        Whenever we talk about chasing any financial goal, it is usually a two-step process:

        • Ensuring healthy savings
        • Making smart investments

        You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

        Ensuring Healthy Savings

        Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

        This is the focal point from where you start your journey of achieving financial goals.

        1. Track Expenses

        The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

        Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

        If you’re not sure where to start when tracking expenses, this article may be able to help.

        2. Pay Yourself First

        Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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        Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

        The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

        Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

        3. Make a Plan and Vow to Stick With It

        Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

        Nowadays, several money management apps can help you do this automatically.

        At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

        Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

        You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

        4. Make Savings a Habit and Not a Goal

        In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

        Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

        • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
        • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
        • If you go shopping, always look out for coupons and see where can you get the best deal.

        The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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        5. Talk About It

        Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

        Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

        6. Maintain a Journal

        For some people, writing helps a great deal in making sure that they achieve what they plan.

        If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

        When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

        Making Smart Investments

        Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

        1. Consult a Financial Advisor

        Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

        Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

        2. Choose Your Investment Instrument Wisely

        Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

        Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

        As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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        3. Compounding Is the Eighth Wonder

        Einstein once remarked about compounding:

        “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

        Use compound interest when setting financial goals

          Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

          Start saving early so that time is on your side to help you bear the fruits of compounding.

          4. Measure, Measure, Measure

          All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

          If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

          Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

          The Bottom Line

          Managing your extra money to achieve your short and long-term financial goals

          and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

          More Tips on Financial Goals

          Featured photo credit: Micheile Henderson via unsplash.com

          Reference

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