When it comes to your finances, understanding credit and how it works can be one of the most confusing and frustrating aspects. Myths and misconceptions about credit scores run rampant, so it can be difficult to know what’s what. Even if you have the best intentions, it can end up being costly to make a mistake as a result of not understanding how credit works. Here are 6 of the most common credit myths, debunked.
1: Closing a lot of credit cards will improve my credit score.
Your credit score takes the average length of your credit accounts into consideration, so closing a credit card you’ve had for a long time can actually have a negative impact on your score. Your score is also determined based on the amount of available credit you have, so closing a credit card with a high credit limit can decrease your debt-to-available-credit ratio. Try to avoid closing too many credit cards at once and consider just putting some of your credit cards aside so you can leave them open without actually using them.
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2: I don’t have any credit cards or debt, so I must have a good credit score.
A lack of credit or debt can actually make you appear unfavorable in the eyes of a lender. Lenders gauge your creditworthiness based on your history of responsible credit use.
A limited history of credit (and on-time payments) can actually result in a lower score and a lender seeing you as a risky borrower. However, there are steps you can take to build your credit from scratch.
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3: Checking my credit report will lower my credit score.
Checking your own credit report is considered a “soft inquiry” and will have no effect on raising or lowering your credit score. You can check your credit report annually for free with each of the 3 bureaus (Transunion, Experian, and Equifax).
4: I always pay my bills on time – therefore I must have a high credit score.
While payment history does make up a significant portion of your credit score, other factors are taken into consideration as well. Your credit score is also determined by your length of credit history, amount owed, types of credit, and number of credit inquiries.
5: I make a lot of money, so I must have a good credit score.
Your income or the amount of money you have saved in the bank has no bearing on your credit score, other than the fact that this may enable you to make your minimum monthly payments. Other information that is not included on your credit report is your ethnicity, criminal record, political affiliation, religion, medical history, and gender.
6: With a bad credit score, I can never get a loan.
This is not necessarily true. While it will certainly be more difficult, there are companies willing to lend to people with lower scores. However, you will likely have a higher interest rate than someone with good credit. An alternative is to have someone cosign a loan for you, though this option should be approached with caution.
When it comes to your finances, knowledge is power. Educating yourself on how to build the perfect credit history will turn you into a prime candidate for things like a mortgage or personal loan. Now that you know some of the most common myths about credit, get to work on boosting your score!
It isn't always easy to stay on top of your finances, especially when you have developed unhealthy spending habits over the years. However, as you begin to realize the many benefits of having healthy finances, it can become something you want to make a conscious effort to improve. When your finances are in a good place, you often have access to better opportunities whether it be a mortgage loan, greater credit line or business loan. On that note, here is how you can become an expert at managing your finances in case you need a few tips.
Learn to Use Technology
The good thing about managing finances in the technological age is that you don't have to do it alone. There are so many apps available that will help you pay bills on time and track your expenses. For instance, some apps force you to live within your actual income and tell you what to do when you need to balance your budget.
If you need an app that will help you get better at saving, then some will set aside your spare change for you. Also, don't be afraid to use more simple tools such as your smartphone calendar to set reminders about payments if you don't automate them.
Seek Legal Advice
Sometimes, being an expert at something means understanding that you can't possibly know it all. This is why you have professionals around you that can help fill in the gaps where you're lacking. Consider hiring a legal firm to help with any challenges that are beyond you. Lexington Law is a good firm as they could help remove negative items from your credit report. Read this Lexington Law Review (Our #1 Credit Repair Service of 2019) to find out more about how they could help improve your finances.
You can't do better than what you know when it comes to managing finances. You should, therefore, invest your time in learning more about finances and how to manage them. Think about what your goals for your finances are and what knowledge gaps you need to fill.
For example, if you want to invest in the stock market so that you can improve your net worth, then you may need to learn more about investing to do so successfully. To boost your knowledge, try reading articles on credible blogs that share finance information from professionals. Also, be weary of content from finance-driven companies as it could be biased.
Work on Growing Your Income
As a self-proclaimed finance guru, you know that the more sources of income that you have, the better. Work on increasing your streams of income so that you have more money to meet your targets whether it's to save for a property or put larger sums towards retirement. One way to do so would be by getting extra income by doing social media marketing for businesses or creating tutorials on YouTube. If you own a property, renting out rooms is a great way to make passive income.
Live Within Your Means
It can be difficult to live within your means when you live in a society that is always presenting you with things to buy. However, being more conscious about the things that you purchase could help you realize that most are wants rather than needs. To live within your means, always take time to think about a purchase as opposed to impulse spending. You should always get good at bargain hunting as many times you can find items of similar quality at a cheaper price.
Learn How to Manage Debt
Debt doesn't have to be a bad thing if you understand how it works and how to manage it. It can be a tool for credit building when you understand the fundamentals. For instance, if you take out a loan or credit card, always be mindful of your interest rates.
By paying the amount of money you borrowed back in full before the due date, you won't have to pay interest on what you borrowed. If you can't pay back in full, paying more than the minimum payment will ensure you incur less interest. For the most part, the secret to good debt management is never spending more than you can afford to pay back.
Managing finances is a life skill that can help improve your quality of life. By following the mentioned tips and taking your finances more seriously, you're more likely to master the art of healthy finances.