If you, like Shumate, plan to make a big purchase in the near future, it’s important to understand all the factors that affect your credit score. You also need to be able to separate fact from fiction. Below are a few common myths about credit and debt management.
Myth: If you have a good credit score, you don’t have to pay attention to what’s in your credit report.
Reality: Read and understand what’s in your credit report. A mistake could cost you the best rate on a loan or cause you to be denied. It could also make you a target for identity theft. Look at the accounts carefully and make sure they’re yours,†says Liz Weston, personal finance columnist for
Myth: Credit inquiries will ruin your score.
Reality: “Credit inquiries don’t matter as much as rumored,†says Weston. “Your score is impacted by about five points, but then it fades quickly in a few months.†A “hard inquiry,â€
Myth: Bankruptcy will solve all your credit problems.
Reality: “Bankruptcy is the single worst thing you can do to your credit, so call [creditors] about a solution first,†says Weston. Chapter 7 bankruptcy remains on your report for 10 years and Chapter 13 for seven years. Your credit score can drop by as much as 300 points.
Myth: You’re safe as long as you pay the minimum.
Reality: Credit utilization is important. FICO credit scores look at balances reported and available credit. The higher one’s percentage of credit used, the more damage it does to his or her score. “Paying the minimum may put you in good stead with the credit card company, but there’s still an unpaid balance over time, which affects your score,†says Barry Paperno, consumer operations manager for myFICO.com. Experts advise using as low a percentage of your available credit as possible, but the ideal percentage is below 10%.