Econintersect: When it comes to credit many definitely develop bad financial habits. People want to spend less, but they open new lines of credit such as store credit cards anyway. Almost everyone says they want to pay off debt, but only pay the minimum due each month. Some actively try to turn credit around and boost scores and but they might actually have some delusions about credit that can keep these goals out of reach.
So what should one do? Below we cover five popular credit myths that that inhibit people from improving their credit and getting a better grip on finances.
1. The Myth of the Single Universal Credit Score
People talk of about their credit score as if there's only one. In reality, each credit reporting agency calculates your score through bureau analytic processes, USNews.com reported. Often credits scores differ significantly from one rating agency to another.
2. The Myth of Bad Credit Auto Loans
When consumers with bad credit need a car, they'll usually avoid buy here pay here (BHPH) car lots because of the lots' bad reputations. And the belief is that the buyer/borrower can expect to pay in excess of 30% interest at a BHPH lot. This is false information. Various dealerships offers such like buy here pay here cars at DriveTime, for example, list the average interest rate slightly above or below 20% APR, and comply with The Fair Accurate Credit Transaction Act and State Usury laws as well. Yes. 20% is still a lot of interest, but for someone with poor credit it may be the only way they can get a car loan. And for such a person the completion of that credit contract by paying off the loan may be an important step on the road to establishing good credit.
3. The Myth of the Free Credit Score
Checking your credit score for free is possible, but it must be done correctly. Websites like FreeCreditReport.com want you to believe they're the place to go if you don't want to end up "selling fish to tourists in t-shirts." However, FreeCreditReport.com isn't all that it's hyped up to be. The services allow you to access only one report, and you have to pay a monthly fee, unless the customer cancels before they're able to get your money, Forbes.com reported. Borrowers will want to visit AnnualCreditReport.com, a conglomerate website created by the big three credit bureaus, to instantly access each credit report once yearly for free.
4. The Myth of the Closed Credit Card
If you think closing your account before you accrue too much debt will boost your score, think again. One crucial factor in determining your credit score is the proportion of total balances to total credit limit, Experian.com reported. Closing accounts cancels a portion of your available credit limits, thus causing balances to seem ostensibly higher in comparison to the total limit. The ratio of current credit card balance to your overall credit limit (across all of your cards) is a primary element in calculating your score. Let's say a borrower has $20,000 of credit on a slew of credit cards and has a balance of $4,000. In this scenario: 20% of available credit is being used. Now if the borrower closes one credit card (with a $8,000 limit) and reduces the credit limit to $12,000, the borrower is using about 33% of available credit. These higher percentages subtract points from credit scores.
5. The Myth of Too Much Available Credit on Credit Cards Can Hurt Your Scores
Some might think a credit lender will deny your credit app because you have too much credit available with the logic being that if a consumer were to use all of that available credit, she may not be able to make the payments on the card. And this may have been true in the past, but not anymore. According to a report by Credit.com, there's nothing in scoring formulas that penalize for having too much available credit and, if anything, will prove your creditworthy, as more lower balance credit lines tend to make you look better.
- 9 Credit Score Myths, Debunked (Kimberly Palmer, US News and World Report, 08 June 2010)
- A New Bubble: Used Cars (GEI News, 06 November 2011)
- DriveTime (Company website)
- 3 Myths I Used to Believe About Credit Scores (Bethy Hardeman, Forbes, 21 June 2012)
- Request your free annual credit report (Website sponsored by Experian, Equifax and TransUnion)
- Improve Your Credit Score (Experian web site)
- 5 Credit Myths to Ditch in 2013 (Jil Krasny, Credit.com, 08 January 2013)