Advertising
Advertising

5 Misconceptions About Credit Scores

5 Misconceptions About Credit Scores

Credit reports and scores have become an essential part of our daily lives since the 1980s when banks implemented a system to calculate consumers’ creditworthiness. Today, it is crucial to thoroughly understand your credit valuation as a borrower. However, most consumers have very limited knowledge about what improves and hurts their credit score. As a result, their ratings remain low as they struggle to make payments on balances with high interest rates. Below we have put together the top five misconceptions about credit scores.

1. There is only one credit score.

Contrary to this belief, there are several models to calculate credit ratings. FICO is the name of the most popular model used by many lenders. The score range is from 300 to 850. The higher the number, the better is your standing as a borrower. Before applying for credit, you can request your score from one of the companies. It will give you an idea what lenders will see when they pull your credit information. Keep in mind that scores from different companies may vary by several points.

Advertising

2. Checking your credit hurts your score.

The answer to this is both yes and no. Nowadays, not only lenders may request your credit report, but insurance companies, landlords, potential employers may also look at your credit ratings to make financial decisions. However, unless you apply for a loan, most companies do a “soft inquiry” that does not affect your score. Your own requests are also considered a “soft” pull and will not hurt it. When reviewing a credit application, a loan officer makes a “hard inquiry” that will lower your score by a few points. Think twice about applying for new credit if your credit score[1] is low. It is unlikely that a lender will approve your request, and you will lose your credit points.

Advertising

3. Closing credit accounts will improve my score.

This is one of the biggest misconceptions that consumers have.[2] Actually, closing your credit cards will have the opposite effect and will lower your score. Why? Because it decreases the amount of credit available to you in relation to the balances you owe. The higher this ratio is, the lower your rating will be. Even if you do not use your credit cards, the account history remains on your report. Together, good payment record and the length of time accounts have been opened contribute to a large percentage of your credit score. Leaving those accounts open improves your rating over a period of time.

Advertising

4. It takes a long time to bring the credit score up.

So, credit rating plunged after a few missed or late payments. How can you bring it back up? Closing accounts with negative marks will not boost your score. Creditors can still view the information on closed accounts and can determine whether you can manage your debt well enough. However, there are ways to improve your creditworthiness. Scores update every 30 days and reflect your activity during that time frame. If you make payments on time and do not use any new credit, your number has a potential to increase by as much as 20 points in just three months.

5. Paying off collection accounts will not improve my credit score.

This is a very common misconception that does not have a definite yes or no response. It is important to understand that a credit report is a history of how you have managed your credit over a period of time. As you clean up collection accounts, make on-time payments, lower or pay off balances, the adverse records will no longer dominate in your credit file. As a result, your score and your creditworthiness will eventually improve. Keep in mind that collection accounts and other negative marks such as debt settlement, foreclosure, and bankruptcy, remain on the report for seven to ten years. As long as these marks are valid, they cannot be deleted. In some situations, credit repair specialists can assist in removing derogatory records from credit reports. If you find a collection account that has been paid off a long time ago or a delinquent account that does not belong to you, contact a credit repair company for assistance.

Featured photo credit: Acorns.com via 1y986jl0sf53nmdkrzen9mln-wpengine.netdna-ssl.com

Advertising

Reference

More by this author

3 Tips to Protect Your Home From Natural Disasters 5 Misconceptions About Credit Scores 5 Simple Ways to Increase Your Walk-In Traffic 3 Signs That You Are Addicted To Sports Betting 5 Small Business Decisions Usually Made Too Late

Trending in Money

1 The Best Ways to Save Money Even Impulsive Spenders Can Get Behind 2 How to Answer the Tough Question: What are Your Salary Requirements? 3 How Personal Finance Software Helps You Get More Out of Your Money 4 The Definitive Guide to Get Out of Debt Fast (And Forever) 5 35 Real Ways to Actually Make Money Online

Read Next

Advertising
Advertising

Published on November 20, 2018

The Best Ways to Save Money Even Impulsive Spenders Can Get Behind

The Best Ways to Save Money Even Impulsive Spenders Can Get Behind

The truth is, there are many “money saving guides” online, but most don’t cover the root issue for not saving.

Once I’d discovered a few key factors that allowed me to save 10k in one year, I realized why most articles couldn’t help me. The problem is that even with the right strategies you can still fail to save money. You need to have the right systems in place and the right mindset.

In this guide, I’ll cover the best ways to save money — practical yet powerful steps you can take to start saving more. It won’t be easy but with hard work, I’m confident you’ll be able to save more money–even if you’re an impulsive spender.

Why Your Past Prevents You from Saving Money

Are you constantly thinking about your financial mistakes?

If so, these thoughts are holding you back from saving.

I get it, you wish you could go back in time to avoid your financial downfalls. But dwelling over your past will only rob you from your future. Instead, reflect on your mistakes and ask yourself what lessons you can learn from them.

It wasn’t easy for me to accept that I had accumulated thousands of dollars in credit card debt. Once I did, I started heading in the right direction. Embrace your past failures and use them as an opportunity to set new financial goals.

For example, after accepting that you’re thousands of dollars in debt create a plan to be debt free in a year or two. This way when you’ll be at peace even when you get negative thoughts about your finances. Now you can focus more time on saving and less on your past financial mistakes.

Advertising

How to Effortlessly Track Your Spending

Stop manually tracking your spending.

Leverage powerful analytic tools such as Personal Capital and these money management apps to do the work for you. This tool has worked for me and has kept me motivated to why I’m saving in the first place. Once you login to your Personal Capital dashboard, you’re able to view your net worth.

When I’d first signed up with Personal Capital, I had a negative net worth, but this motivated me to save more. With this tool, you can also view your spending patterns, expenses, and how much money you’re saving.

Use your net worth as your north star to saving more. Whenever you experience financial setbacks, view how far you’ve come along. Saving money is only half the battle, being consistent is the other half.

The Truth on Why You Keep Failing

Saving money isn’t sexy. If it was, wouldn’t everyone be doing it?

Some people are natural savers, but most are impulsive spenders. Instead of denying that you’re an impulsive spender, embrace it.

Don’t try to save 60 to 70% of your income if this means you’ll live a miserable life. Saving money isn’t a race but a marathon. You’re saving for retirement and for large purchases.

If you’re currently having a hard time saving, start spending more money on nice things. This may sound counterintuitive but hear me out. Wouldn’t it be better to save $200 each month for 12 months instead of $500 for 3 months?

Advertising

Most people run into trouble because they create budgets that set them up for failure. This system won’t work for those who are frugal, but chances are they don’t need help saving. This system is for those who can’t save money and need to be rewarded for their hard work.

Only because you’re buying nice things doesn’t mean that you’ll save less. Here are some rules you should have in place:

  1. Save more than 50% of your available money (after expenses)
  2. Only buy nice things after saving
  3. Automate your savings with automatic bank transfers

These are the same rules that helped me save thousands each year while buying the latest iPhone. Focus only on items that are important to you. Remember, you can afford anything but not everything.

How to Foolproof Yourself out of Debt

Personal finance is a game. On one end, you’re earning money; and on the to other, you’re saving. But what ends up counting in the end isn’t how much you earn but how much you save. Research shows that about 60% of Americans spend more than they save.[1]

So how can you separate yourself from the 60%?

By not accumulating more debt. This way you’ll have more money to save and avoid having more financial obligations. A great way to stop accumulating debt is using cash to pay for all your transactions.

This will be challenging, depending on how reliant you are with your credit card, but it’s worth the effort. Not only will you stop accruing debt, but you’ll also be more conscious with what you buy.

For example, you’ll think twice about purchasing a new $200 headphone despite having the cash to buy them. According to a poll conducted by The CreditCards.com, 5 out of 6 Americans are impulsive spenders.[2]

Advertising

Telling yourself that you’ll have the discipline to not buy things won’t cut it. This is equal to having junk food in your fridge while trying to eat healthy–it’s only a matter of time before you slip. By using cash to make your purchases, you’ll spend less and save more.

A Proven Formula to Skyrocket Your Savings

Having proven systems in place to help you save more is important, but they’re not the best way to save money.

You can search for dozens of ways to save money, but there’ll always be a limit. Instead of spending the majority of your effort saving, look for ways to increase your income. The truth is that once you have the right systems in place, saving is easy.

What’s challenging is earning more money. There are many routes you can take to achieve this. For example, you can work long and hard at your current job to earn a raise. But there’s one problem–you’re depending on someone else to give you a raise.

Your company will have to have the budget, and you’ll have to know how to toot your own horn to get this raise. This isn’t to say that earning a raise is impossible, but things are better when you’re in control right? That’s why building a side-hustle is the best way to increase your income.

Think of your side-hustle as a part-time job doing something you enjoy. You can sell items on eBay for a profit, or design websites for small businesses. Building a side-hustle will be on the hardest things you’ll do, be too stubborn to quit.

During the early stages, you won’t be making money and that’s okay. Since you already have a source of income, you won’t be dependent on your side-hustle to pay for your expenses. Depending on how much time you invest in your side-hustle, it can one day replace your current income.

Whatever route you take, focus more on earning and save as much as possible. You have more control than you give yourself credit for.

Advertising

Transform Yourself into a Saving Money Machine

Saving money isn’t complicated but it’s one of the hardest things you’ll do.

By learning from your mistakes and rewarding yourself after saving you’ll save more. What would you do with an extra $200 or $500 each month? To some, this is life-changing money that can improve the quality of their lives.

The truth is saving money is an art. Save too much and you’ll quit, but save too little and you’ll pay for the consequences in the future. Saving money takes effort and having the right systems in place.

Imagine if you’d started saving an extra $100 this next month? Or, saved $20K in one year? Although it’s hard to imagine, this can be your reality if you follow the principles covered in this guide.

Take a moment to brainstorm which goals you’d be able to reach if you had extra money each month. Use these goals as motivation to help you stay on track on your journey to saving more. If I was able to save thousands of dollars with little guidance, imagine what you’ll be able to do.

What are you waiting for? Go and start saving money, the sky is your limit.

Featured photo credit: rawpixel via unsplash.com

Reference

Read Next