Four Myths about Credit Debunked

For most people, credit scores are something of an enigma. We all understand the basic underlying principle—if I pay my bills, I’ll have good credit—but few of us actually know the details involved in calculating a credit score. Worse yet, many of us hurt our scores because of our lack of understanding. Here are four commonly-held myths about credit that are holding you back.

Myth #1: Too many credit cards will hurt my credit score.

This commonly-believed myth about credit hurts people in a couple ways. First, I’ve interviewed many people who have cancelled all but two of their credit cards because they believed that these cards were hurting them. The truth is that the moment they cancelled their cards, their scores dropped by as much as 150 points. Yes, it is true. By cancelling your cards, you reduce the number of healthy accounts you have, which lowers both the amount of credit you have been granted and, in most cases, the average length of credit history for each account, reducing your score drastically.

Secondly, too many people refuse credit applications because they fear they will have too many accounts. Fair Isaac Corporation, the company that designed the formula for credit scoring, says that the average consumer has 13 credit obligations. However, adding more accounts does not hurt.

On the other hand, it is true that too many credit inquiries will hurt your score. In other words, if you are out applying for a new card or loan every week, your score will be lowered. This is also another reason why you need to get the credit accounts you desire and keep them. Do not whimsically apply for and cancel credit accounts.

Myth #2: I have to use my credit cards to build credit.

This is the classic myth; it’s everywhere. How many people have you heard say “I use my card once a month so it shows activity on my account?” I used to believe this one myself, but here is the truth: you don’t have to use your card at all. In fact, it’s better if you don’t. Fair Isaac Corporation says that the average consumer carries a balance of 30% of their credit line. If you go over this, your score will be lowered. If you stay under this, your score will be raised. If you have a zero balance, you will get the most points possible. They only report balance and payments; whether or not it’s been used is superfluous.

Myth #3: I should have good credit; I pay my utilities and cell phone bill on time every month.

This is one of the sad facts about credit. It may be used to determine your ability to pay for everything you do, but not everything you do will reflect on your ability to pay. In other words, your cable company, phone company, gas company, etc., are all going to check your credit (they probably won’t tell you either). However, because these institutions are not granting you credit, they will only report to the credit bureaus if you fail to pay. In other words, when it comes to phones, utilities, and cable, you can only hurt your credit, not build it.

Myth #4: There is nothing I can do once I have a late payment.

This one has got to go. It’s actually extremely easy to remove a late payment, and the sooner you do it the better. Removing a late payment from years ago can be a little more difficult, though definitely doable, than removing a late payment from last month. If you show a late payment on your transaction history, call your credit card company and you’ll be amazed how easily they will remove it. Call the company and get a customer service representative on the line. I simply say “I have a favor to ask of you. I have a late payment showing here on my account record. Is there any way you can remove that for me? I’d really appreciate it.” I’ve actually never had a credit card company refuse my request. Why? Because they want me to keep using their card, that’s why. Now, that’s not to say you can be late all you want. If you are late each month, then you probably aren’t going to get much help. If you were late one time in a year, I’m sure you’ll be helped. I can also tell you that a penitent tone will get you further than yelling. In the past, I’ve simply told them that I spaced the payment, and they have been accommodating for me.

You may not like the credit game, but we all have to play it. So, you might as well know the rules. With these four myths debunked, you are that much closer to having excellent credit and better borrowing capabilities.

If you like our articles, subscribe for free to The Path to Wealth.