Common Credit Score Myths
Credit scores and reports are complex and can be confusing. When an individual is young and beginning to build their score, it can be overwhelming when hearing contradicting information. As a loan officer I have adults coming into my office, often with information already heard, some fact and some fiction. I would like to clear up a couple of credit score myths that I have heard in the office.
A common thing I hear is, “I was told to get a small limit credit card, spend my limit and then pay the minimum balance until my credit card is paid off”. When utilizing a credit card, no matter what the limit is, no more than 30% of the limit should be used. If utilization is at 30% or more of the credit limit, the credit score will begin to decline. The reason for this; it reflects positively if you have funds available for use, but you don’t need to use it all. It is encouraged to pay your statement balance in full each month. Paying the statement balance in full will help prevent interest from adding up. It also shows that the credit offered is not being used as an extension of your income.
Myth number two: “I have a few collections and I am going to start making payments to the oldest one first”. It may take up to seven years for debt collections to fall off the credit report, which is required by The Fair Credit Reporting Act. This doesn’t mean that one should wait the seven years for those to “disappear”, it just means to prioritize the most recent collections before the older ones. Although the debt falls off the credit report after seven years, that does not mean that the debt doesn’t exist any longer. This debt is still owed, it just stops reporting to the credit bureaus.
Another common statement: “I am going to pay off all of my credit card debt and close all of my cards”. While it is great to pay off credit card debt, my recommendation would be to pay it off and keep some cards open. If the card is not being used for an extended period of time, some companies may close the card for you. If you pay off your card(s) and close it/them, the positive payment history that was reporting to that card is essentially gone. It is taken out of consideration for your score completely. I am not saying to never close a credit card, I would just recommend keeping at least one open to report for revolving credit history. The other reason is to show available credit, having a balance not used helps the capacity. The capacity is that percentage mentioned earlier that should be under 30%.
One more bit of information I hear is, “My credit should be perfect; I have paid for everything in cash”. Saving up for things and paying for them in cash is an incredible feeling and saves money spent on interest. Just be sure to finance something occasionally. If the credit report doesn’t stay active, the score will not only go down but go away after some time.
There are so many components that go into an individual’s credit report and I have only gone over a few of them. Credit is something that is important to start building as soon as someone’s 18th birthday comes up, if not sooner. A good credit score comes with time and experience, so it takes patience. When it comes time to purchase a vehicle and the interest rate is low, or time to purchase a home and the mortgage is pre-approved, it will be well worth it.Meranda Scheel
Financial Services Specialist
WESTconsin Credit Union
Originally published in the publication Chippewa Valley Family.
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