You may know the rules of the game when it comes to unsecured debt – including credit cards and student loans, but do you know what doesn’t affect a credit score? What is or isn’t reported to the credit bureaus? Below are a few common myths that consumers have believed for years but aren’t true.
Once you can distinguish between fact and fiction, you’re already on your way to a stronger credit history and the high credit scores that come with it. Don’t make these wrong assumptions:
Myth 1: Making multiple payments each month on my credit cards will lower my scores.
That’s not true at all. In fact, the dollar amount isn’t even reflected on most reports nor are there multiple weekly “entries” on a credit report. Your credit scores are determined solely on how the creditor reports your payments. They report you paid or didn’t pay – simple as that. And the credit system is set up to acknowledge monthly, not weekly, payment cycles.
Myth 2: I can rebuild my credit with prepaid debit cards.
Not at all true – in fact, nothing could be further from the truth. In order for a credit card company or bank to report an account to the bureaus, it must have a vested interest in how you pay your bills. With prepaid debit cards, you’re using your money. You make deposits to your prepaid card account and then spend the balance. No one is extending credit.
Myth 3: There’s no difference in prepaid cards and secured cards.
As mentioned, with prepaid cards, you’re using your own money. With a secured credit card, you’re using your own funds in the form of a savings account as collateral, but your credit limit is predetermined and the bank or credit card company is extending to you a credit line that’s secured with your own funds. Because of this, the financial entity that’s extended that credit does have an interest in how well you pay your bills and as a result, it reports to the credit bureaus how responsible you are with its money.
Myth 4: Making more than the minimum payment will boost my credit scores.
The only payment amount that would affect your credit scores are those that are less than the minimum amount due. Again, those details aren’t reported. What you can expect, however, is less interest you’ll have to repay. Anytime you can pay more than what’s due, you’re doing yourself a favor – just don’t expect it to reflect in your credit scores.
Myth 5: Our kid won’t qualify for college financial aid because as his parents, we have too much saved.
Your savings account won’t hurt you or your child’s chances when you’re trying to qualify for financial aid in most instances and even if it is, it will only be a portion of your savings that will be taken into consideration. Your retirement account isn’t included in the calculations, either. In fact, you won’t even be asked if you have a retirement fund.
Myth 6: Changing jobs will lower my credit scores.
Because it can be challenging to keep up with millions of consumers’ employers, especially when they change jobs, this isn’t information typically found on a credit report and if it is, it’s not given any weight. It’s treated as sort of a footnote. Not only that, but your salary isn’t included on your credit report either for the same reasons – it’s impossible to keep it up and keep it accurate. Besides, when you apply for new credit, you’ll have to provide proof of income anyway.
Myth 7: My divorce will hurt my credit scores.
That one might actually be true, but not for the reasons you think. Divorces are messy. Trying to discern who’s responsible for what from a financial perspective can be tricky. If a spouse is ordered to pay the joint credit accounts, including credit cards, and fails to do so, it will reflect on the credit reports of those named on the account. Better to stay on top of it until you can finally sever all of the financial ties that bind.
Myth 8: One late payment won’t affect my credit scores that much.
That’s a bit tricky since these scenarios will affect every consumer differently. A lot depends on your past history, how long your history is, the type of account and whether you’ve missed other payments in the same time frame.
Myth 9: A lien on my credit report will drop off after 7 or 10 years.
That’s not true at all. A lien will remain on your report until it’s addressed. A lien is something creditors will attach to your credit report so that anytime your finances change, it can move in to collect what’s due. A lien on your credit can prevent you from buying a car or a house since if you default on an account and it files suit against you, it will only be able to collect after the lien has been satisfied. In other words, it will play second fiddle and no financial entity wants to take that risk.
Myth 10: I’m going to close my credit card account I’ve had for ten years because I have other credit cards with better perks.
This is another one of those tricky ones. Most financial minds will discourage you from closing your oldest accounts since it removes, in essence, the actual “history” in your credit history. On the other hand, if you’ve had years to build your credit file and there are other accounts that are just as old, closing an older credit card won’t mean the same thing for you.
When it comes to our finances, it’s always better to err on the side of caution until we know, without a doubt, the best avenue to take. One mistake can mean we pay more in interest from our houses to our cars to our credit cards. Assume nothing and don’t underestimate due diligence – no one will do it for you.