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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.

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

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Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

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