Credit is one of the most easily misunderstood aspects of our financial lives, and while you may have collected various theories from friends, family and the formidable internet, chances are that some of these theories were just another myth. Here’s a quick handy guide separating the facts from the myths :

MYTH I : CLOSING AN UNUSED ACCOUNT BOOSTS CREDIT SCORE

FACT : This move can backfire and cause your credit score to plummet!

The percentage of your credit card balances in relation to the credit limits is a significant factor in your credit score calculation. Closing an account will lower this available line of credit, causing a spike in revolving utilization, thereby reducing your score.

MYTH II : PAYING OFF BAD DEBTS WILL REMOVE THEM FROM YOUR CREDIT REPORT

FACT : Most negative information will remain in your credit report for 7 years.

This was a shocker, I know ! You were so sincere about paying off that bad debt, past due payments or finally gave in to the calls from the debt collector, but unfortunately, this record does not disappear into thin air as you’d like.

However, this does not mean you should give up all your efforts to building that credit. Stay the course and you will see your score improving within 12-24 months.

MYTH III : PAYING YOUR BILLS ON TIME GUARANTEES A GOOD CREDIT SCORE

FACT : Paying bills on time accounts for 35% of your score, and there’s more slices in this pie

Here’s all the factors along with the weights that impact your credit score:

• Payment History — 35%
• Debt — 30%
• Credit Mix —15%
• Length of Credit History — 10%
• Inquiries — 10%

Not only do you need to ensure timely payments, ensure that your credit limit utilization is low, avoid multiple inquiries and consistently maintain a good credit history in order to see the beautiful number on your report.

MYTH IV : MORE INCOME MEANS HIGHER SCORES

FACT : Your income is never reported on your credit reports

You may have won the Powerball lottery, but this will not impact your credit score one bit, because your credit score only uses information from the credit report comprising of the factors listed previously. On the flip side, would you care about your score if you won the jackpot ? 😉

And lastly,

MYTH V : CREDIT IS EVIL, SO PAY CASH

FACT : Credit, if used wisely, can be an asset

Paying cash for everything is often a good piece of advice when your spending is out of control and you keep hearing the word FREEZE too often from everyone. However, if you only borrow what you can comfortably afford to pay off, credit can become an asset. In order to qualify for home or auto loans, you must have a credit score and good report, which can never be built if you pay for everything with cash.

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Building a good credit report can work in your favor and save you thousands of dollars only because of obtaining a lower interest rate on that loan. Don’t allow the bank to take away your hard earned money, just because you held on to these credit score myths so tightly.

Be Frugal, Be Smart, Be Rich !

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Plastic Money – when Debt comes disguised as Wealth!