The internet is by far the easiest tool for sourcing information. However, we all know how common it is to be fed the wrong information, taken advantage of, or blatantly lied to. Unfortunately, the same is often true when it comes to information focused on personal finance and credit. Even the word “credit” means different things depending on the context. To set the record straight and help young professionals start the New Year with financial confidence, we will be separating fact from fiction by busting a few common credit myths. If you are looking to repair your credit score then we recommend checking out these credit repair companies according to Debited.com.
Key Terms:
Credit– A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest.
Credit Report– A summary of your entire financial history. Think financial permanent record containing all financial remarks, good or bad, reported to the credit bureau, including credit inquiries, account closures, late payments, collections requests, and many more.
Credit Score– A measure of an individual’s creditworthiness, like a financial report card. Using payment history, income, debt, open accounts, and a few other indicators to produce a score lenders can reference instead of requesting your full credit report.
Myth 1: Without credit history, it’s extremely difficult or nearly impossible to get qualified.
False. Building a credit report and history shouldn’t be difficult, assuming you’re financially responsible and haven’t defaulted on a loan, or filed for bankruptcy. Young professionals with or without student loan debt can be approved as long as they maintain a steady job and monthly income.
If you’re new to credit cards, or just looking to start your credit history on the right foot, consider a secure credit card that allows you to practice responsible credit usage with the safety of a pre-paid card.
Myth 2: When applying for your first credit card, you should apply to multiple lenders at the same time to see who gives you the most credit.
False. Although it may seem like a good idea to “shop around” and apply for a bunch of cards at once, each new credit request, also known as an inquiry, requires a “hard pull” or lender review of your credit report. Hard pulls are translated to your credit report and remain there for up to two years while adversely affecting your credit score by nearly 5 points an inquiry. Multiple inquiries within a short amount of time shows a potential lender both credit approvals and denied applications.
Pre-approved lines of credit are a great place to start. Although they often have higher interest rates, the fact that you’re already qualified means almost guaranteed approval. If you’re applying for your first credit card, do your research and only apply for one card. Remember, credit requires trust, so spend wisely and pay your bills on time and over minimum every month to show lenders you’re a dependable borrower.
Myth 3: Using a credit card for all purchases will immediately improve your credit score.
False. Responsible credit usage does help you establish a user history with the lender. However, there are multiple factors that contribute to a credit score including payment history and amount owed. For example, missing a payment or exceeding 30% of the credit limit puts you at risk of defaulting or overspending. Not only would the increasing credit utilization reduce your score, so would multiple missed payments. Spending wisely and maintaining a healthy credit utilization ratio can help you improve your score over a longer period of time.
Myth 4: Your credit score changes every week.
False. Some lenders may provide score calculators that compound your transaction history into an estimated score that could be updated weekly or monthly. However, official credit scores such as those generated by the 3 major credit bureau traditionally get updated at the end of the month or financial quarter once all information has been received from creditors.
It is still important to monitor your score frequently for any major changes or discrepancies resulting from unauthorized usage, credit inquiries, or identity theft. Reporting suspicious activity and disputing errors that appear on your credit report should be done immediately in order to prevent lasting damage.
Myth 5: You can only learn how to use credit responsibly if you were taught how to when you were young.
False. It’s never too late to educate yourself and teach others about credit and financial responsibility!
With a little understanding and a lot of dedication, you can achieve financial confidence in the New Year– all it takes is a little time.
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