In my bankruptcy practice I’m often amazed at the number of credit myths that many folks carry around. Distinguishing between what’s reality and what’s nonsense is not straightforward—so folks will often not ask questions at the risk of appearing foolish or uninformed. So let me deal with some of these myths today.
- One credit report is enough. Simply, wrong. The three major reporting agencies—Experian, TransUnion, and Equifax, each use slightly different criteria in assessing your credit history that can result in a spread of 50 or even 100 points. Also, an error may appear on one report and not another. If you’re checking your credit, always use a service that checks all three agencies.
- Self-checking my credit hurts my credit score. Not true. When you check your own score this is a “soft” inquiry that has no effect on your score. An inquiry when you apply for credit is called a “hard” inquiry that can temporarily affect your score.
- Debit and Credit Cards Affect Credit Scores Equally. Not even close. With a credit card you are in effect borrowing from a lender, who you will repay with interest. A debit card on the other hand withdraws your own money from your account—there is no credit transaction and thus no risk to a lender. Debit cards therefore do not affect your credit score.
- Paying the Minimum Balance is Sufficient. A minimum payment on a credit card will usually result in it being paid off in 20 years or more. Plus, a history of just minimum payments is not good for your score. If your cash is limited and you’re prioritizing payments, a good rule is to be sure to make the minimum payment on every account other than the one with the highest interest or lowest balance, and then concentrate on paying that one off.
- You only owe half of a co-signed debt. When you co-sign for another you are promising that in the event of default you will be liable for the entire balance. If your friend loses their job, the creditor is going to come after you for the whole amount. If you’re both working they may come after both of you, but if your friend is unemployed, or absent, that leaves only you.
- I Don’t Make Enough to Save. Also incorrect. Saving is the core of every financial plan. Every single person who has an income should have some form of savings—whether it’s dropping leftover change in a jar or having an automatic deduction from your paycheck into a savings account. If you don’t save, you won’t have money when emergencies come up, and you won’t have money when it comes time to retire. Plus, saving is a habit—once you have it, it becomes easier until it’s second nature.
- Library Fines Don’t Count. Oh yes they do. If you owe money and don’t pay your creditor—whether the gas or water company, the library, or the homeowners association—they can and will refer you to a collection agency, which will quickly report your non-payment.
- I Can Start Over With a New Credit Identity. Folks, there’s only one way to create a new credit identity and that’s to commit fraud. Such techniques often involve falsely obtaining a new Social Security number or even using one that’s been stolen, which constitutes identity theft. This can result in a criminal prosecution or, at the very least, smear your credit reputation for years.
Folks, I’m hoping you stay away from these harmful myths. If you find yourself in debt trouble always seek out the advice of a financial professional or experienced bankruptcy attorney. The only foolish question about your financial wellbeing is the one that doesn’t get asked.
This post was written by Cypress Coast Law