10 Myths About Building Credit

You don’t need a perfect credit score to secure a mortgage. But a higher score does come with real advantages for homeownership. Lenders can offer you lower interest rates, and you may get a better deal on homeowners insurance. Even setting up utilities can be easier.

Unfortunately, when it comes to building your credit, there are a lot of myths floating around. To get you off to a good start, we decided to bust 10 myths about building credit.

1. A Bad Credit Score Can Never Be Rebuilt

We need to address this right away. If you already have bad credit, you may worry that it’s too late to do anything about it. But many people have succeeded in rebuilding their credit.

The good news is that credit reports generally look at your last 10 years of financial activity. That means that even the worst mistakes do, eventually, disappear. In the meantime, you can focus on making payments on time and wisely handling any lines of credit. It may feel like slow work, but you can succeed in this.

2. You Need Credit to Get Credit

This myth is one of the easiest to debunk. After all, everyone starts life without a credit score. Building one just requires knowing where to start.

Before you do anything else, look up your credit report and credit score. If you’ve made regular payments on a student loan, car loan, or even your internet bill, you may already have a positive credit score. If you don’t have any credit yet, consider opening a credit card with a low limit or a secured credit card. Secured credit cards require a refundable security deposit, but they’re one of the easiest ways to get started!

3. Checking Your Credit Hurts Your Credit

Most of us have been warned that checking our credit will hurt it — which just seems cruel. Fortunately, this myth is rooted in a simple misunderstanding. When a lender checks your credit, this can cause a temporary dip of up to 10 points. This isn’t to punish you for taking out a loan. Creditors just need to see how you’ll handle this new line of credit. But checking your own credit doesn’t have the same effect.

You can check your credit report and score as often as you please. In fact, checking it regularly is a good practice. It will help you better understand what practices help and harm your score. It also gives you the chance to dispute inaccuracies.

4. Your Credit Score is Related to Your Income

Having a good credit score isn’t about being wealthy. It’s primarily about paying your bills on time and using credit responsibly. That means you can have a fantastic credit score even if you don’t have a fantastic salary. 

If you’re building your credit, focus on simple habits for healthy finances. Build a budget, make payments on time and take on reasonable debts. With time, you’ll see your credit start to grow!

5. You Should Always Carry a Small Balance on Your Credit Card

When you pay off your credit card in full every month, you can’t be charged any interest. And some people believe that credit card companies are bitter about this. So, the story goes, you need to always carry a small balance on your card, lest the evil credit card company tank your credit score.

In reality, credit card companies have no say in your credit score. They simply report your debt and payments to the credit bureaus. Paying your credit card bill in full builds your score by showing you are responsible with debt. 

6. Closing Old Accounts Will Improve Your Credit Score

A major part of your credit score is your debt-to-income ratio. Because of this, paying off credit card debt can improve your credit score by reducing your overall debt. However, there are two things you should keep in mind. 

First, don’t close the account when you pay it off — especially if it’s your oldest. A longer credit history counts in your favor, but that history is lost when you close the account. Closing the account also reduces the credit available to you, which can count against you.

Second, paying off installment debt (e.g. student loans, car loans, etc.) can actually cause a temporary dip in your score. That’s because creditors like to see that you’re responsible with the loan payments you have. That doesn’t mean you shouldn’t pay off your student debt. Just expect the temporary dip when you’re done.

7. You Should Pay a Company to Repair Your Credit Score

Credit repair companies look at your credit report, identify inaccuracies and dispute them with credit bureaus. Sounds great, right? But here’s their secret: You can do that yourself for free. These companies don’t have a secret in with credit bureaus. They can’t remove any accurate negative information. And their fees can add up quickly.

Instead, request your free annual credit reports from the three nationwide credit bureaus. Look for inaccuracies on each report, and then contact the bureaus to dispute anything you find. Each credit bureau has its own dispute webpage, which we’ve linked here: Equifax, Experian, TransUnion.

8. Getting Married Merges My Credit Score with My Spouse’s

Marriage means becoming one — except when it comes to your credit. Your credit report and score are uniquely yours for the entirety of your life. However, that doesn’t mean your spouse’s credit score can’t affect your finances.

When you apply for a mortgage (or any other loan) together, lenders will take both credit scores into account. If one spouse has a lower credit score, it counts against you both. This can result in higher interest rates or even being denied a loan. In some cases, the spouse with the better credit score may need to apply for loans individually.

9. You Should Just File for Bankruptcy if You Have Too Much Debt

Bankruptcy relieves you of the obligation to pay certain debts — but it comes at a high cost. Your credit will take a dramatic hit, and you’ll have a harder time securing credit. Depending on the type of bankruptcy you file for, it will stay on your record for seven to 10 years. And while it’s not impossible to rebuild your credit, it is a challenge.

In some cases, it may be the best option, but it’s always best to consider all your options. Before you file for bankruptcy, make sure you look into the many bankruptcy alternatives available.

10. Paying Cash or Debit for Everything Will Help Your Credit Score

This myth is rooted in a general fear of credit cards. However, as their name suggests, credit bureaus base your credit score on how you use credit. Cash and debit payments won’t hurt your score, but they won’t help it either. They’re simply neutral. 

If you feel you won’t be able to use a credit card responsibly, cash can be a good option. However, it will only help you in that you won’t be tempted to overspend. Otherwise, focus on paying your bills on time, using the methods that work best for you.

Take Control of Your Credit

Are you ready to pay off debt and take control of your credit? Our Money Management course will teach you how to create a financial plan, get out of debt, build credit, and plan for the unexpected. Take it online at your own pace. The best time to build your credit is right now!

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