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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.

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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.

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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.

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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.

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Last Updated on April 3, 2019

How to Nix Your Credit Card Debt in Less Than 3 Years

How to Nix Your Credit Card Debt in Less Than 3 Years

Debt is never a fun thing to be in. But, there are many actions that you can take that will help you rid yourself of the burden of debt once and for all.

By coming up with a set plan, eliminating your debt can feel much easier than constantly thinking about it.

This post will provide some tips on how you can do this to help you nix your credit card debt in less than 3 years.

Hint: there are ways that are easier than you think.

1. Consider Consolidating Multiple Credit Cards If Possible

This may not be applicable to you, but if you have multiple cards – it is something to consider. Keeping up with multiple bills is time consuming.

It will depend on the balance you have on each. Consolidate ones you can but do not do it to the point that you get too close to the maximum limit. Also, it is ideal to pick the card with the lower interest rate.

Consider if there are any fees or alternatively, rewards, with transferring a balance to another card. Watch out for fees. Note that some cards offer rewards for transferring a balance to them. This is extra cash that can help go towards paying off your debt.

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Having one or two cards can make nixing your debt much simpler than keeping up with the balance of a bunch of cards. Keeping track of paying the minimum towards a bunch of cards is time consuming. Spend the time to consolidate instead to make the overall process simpler going forward.

My tip: Have one main credit card. Have a second one that you use for necessities – such as groceries or gas – that offers rewards for those purchases (a lot of cards do) and set the second one on auto-pay. You should be able to pay off a smaller amount on auto-pay if it is a necessity. If you think you cannot, then you may need to cut down a lot on expenses.

Why do I suggest doing this? Having one thing set to auto-pay is one less thing to think about. One less thing to waste time on. Same idea with consolidating to one main card. Tracking down too many is a hassle.

2. Try to Pay the Full Balance You Spent Each Month at the Very Least

You need to pay off the amount you are spending each month when that bill comes in. This is the amount you spent THAT month.

Do not let the debt keep accruing while you work on paying any unpaid debt that has accrued. It will become a never-ending battle. Try as best as you can to be current on paying for each month’s expenses when that month’s bill comes out.

If this is a strain, consider why. You may need to cut expenses. Or you may need to consider other cards. Or look at where this money is going.

3. Pay Extra When You Can – Every Small Amount Counts

This cannot be emphasized enough. If you are looking at a lot of credit card debt, it can look daunting, but each extra amount that you can put towards the debt will really add up – no matter how small it is.

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It does not just reduce the principal amount that you have left to pay off, but it reduces the amount that is collecting interest. You will always save money with that reduced interest.

4. Create a Plan on How to Pay Extra

Back to the main point, having this plan is giving you one less thing to think about.

This plan should be a plan that works for you. If it does not work for you, your spending habits, and your views on debt, then it will not be an effective plan.

For instance, if a set plan of an extra $50 (or another amount that you know you can afford) works for you, then do that. Set that aside every month and pay that extra amount. Treat it like a bill. Choose an amount that works for you and pay it like clockwork as though it was a bill you had to pay each month.

Little amounts will not nix it entirely, but they will help tackle it and having a set plan can make it less of a chore. Creating a new plan of how much to put towards it each month is an unnecessary added stress.

5. Cut out Costs for Services You Do Not Use

If you are signed up for subscriptions that you do not use because of some free trial or for some other reason, cut it out. Your overall financial position will look better.

In turn, that will make cutting your credit card debt easier. Look at your statements to find these expenses. If you do not use them, you may forget you are paying some unnecessary amount each month. Cutting it out can really add up in savings that you can put towards other needed expenses.

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6. Get Aggressive About It

Consider these points:

Depending on the interest and the level of debt, you may need to give up a few indulgences. For example, instead of ordering delivery or going out to eat, cook at home. Everything adds up.

Other things may be more of a sacrifice. It may be a trip you wanted to go on, or a daily latte habit you’ve picked up. In these instances, consider how important it is to you and if it’s worth the sacrifice. And if it is a costly expense, think whether you can wait to indulge.

Cutting an extravagant expense can really help make a dent in your overall debt. Try not to add to debt when you are trying to pay it off. It will be a never-ending battle. Make it less of a battle with these tips and it will feel easier.

Bottom line: Do what you can to make this process easier for you. Implement steps that do this. It takes time now, but will help overall. Also, keep track of your spending and paying down of your debts. Which is the next point.

7. Reevaluate Your Progress at Set Intervals

Doing a regular check-in can help you see your efforts pay off or maybe indicate that you need to give this a bit more effort. If you check every 3-6 months, it will not feel so much like a chore or feel so daunting.

By doing this, you will be able to better understand your progress and perhaps readjust your plan. Bonus: if you see it pay off, it will feel great to do this check-in. You will get there.

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Finally (and most importantly)…

8. Keep Trying

Do not get discouraged. Pushing it off will make it worse. Just keep trying.

Once your debt becomes lower, each monthly payment will reduce the balance more. Why? You are paying less towards interest. It will be a snowball effect eventually and it will become much easier to manage. Just get to that point. And know once you do, it will feel easier and motivating.

Start Knocking out Your Debt Today

The best way to eliminate debt is to get started right away. Begin by implementing the above steps and watch your debt just melt away. Try out some of the above strategies and see what works best for you. Soon you’ll be on your way to a debt free life.

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