Let’s face it: When it comes to credit and credit scoring, there’s a lot of misinformation out there. As a result, a lot of folks make assumptions about their credit that are just plain wrong. Here are 5 common examples of false credit assumptions, and the truth behind each one:
1. Paying a late fee means you won’t get reported to the credit bureaus.
If you slip up and pay a bill late, getting hit with a late fee probably seems like punishment enough. After all, forking over an extra $25-$35 for your forgetfulness feels like a sufficient slap on the wrist.
But if your payment is more than 30 days overdue, you should expect a negative mark to land on your credit reports, regardless of whether or not you’ve coughed up a late fee. This one-two punch is a good reason to prioritize paying on time – if you don’t, it could be costly in a number of ways.
2. Your credit utilization ratio is 0% if you pay your balance in full each month.
Paying off your credit card in full each month is a good habit to get into. But as you’re patting yourself on the back for avoiding interest charges, don’t forget to remain diligent about keeping track of your credit utilization ratio.
Here’s why: Your credit card issuer could send a balance report to the credit bureaus at any time during the month – not necessarily right after you’ve paid your bill. Consequently, keeping your balance below 30% of your available credit on all your cards throughout the month is key to maintaining a solid score.
3. All of your monthly bill payments are being reported to the credit bureaus.
Personal finance experts commonly recommend that we pay all of our bills on time. This is certainly important for avoiding late fees (see above), but it causes many people to assume that all of their bill payments are being reported to the credit bureaus.
This usually isn’t the case. Rent and utility payments are typically not reported unless you become seriously delinquent; in other words, paying on time doesn’t add any additional positive information to your credit reports. You still should, but understand that these payments generally won’t give your score a boost.
4. Avoiding credit cards will help your credit score.
In an effort to avoid getting into debt, some people choose to forgo credit cards altogether. While it’s true that maxing out a card will do damage to your credit score, avoiding plastic entirely usually isn’t a good idea, either.
Getting a credit card as soon as you can and using it responsibly (which means paying your bill on time and in full every month) is one of the easiest ways to start establishing a solid credit profile. Eschewing plastic represents a huge missed opportunity, and the longer you go without establishing credit, the harder it will be to do so.
The takeaway? Using a credit card to build your credit doesn’t have to result in debt if you make a budget and track your spending carefully. Usually, the benefits of doing so outweigh the risks.
5. A bankruptcy will affect your credit for the rest of your life.
It’s true: Declaring personal bankruptcy will have a serious, negative impact on your credit. But don’t let Internet rumors or sensational media reports warp your thinking – a bankruptcy won’t trash your credit for life.
In most cases, a bankruptcy will stay on your credit reports for 10 years, and the effect of this event on your credit score will lessen over time. This is not to say that you should treat bankruptcy lightly, but it’s important to know that no negative mark has to affect your credit forever. By letting some time pass and cleaning up your credit habits, there’s always a way to bounce back.
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