5 Credit Misconceptions That Can Lead to Bad Credit

5 Credit Misconceptions That Can Lead to Bad Credit

May 31, 2018    Bad Credit & Credit Scores

If you are confused or intimidated by the world of credit, you’re not alone. There are plenty of online forums and comment sections that are full of people asking questions about credit. From “how do I improve my credit score?” to “what affects my credit score?” — you’re not the only one wondering.
Unfortunately, the answers to some if these questions aren’t so straightforward. To avoid people cheating the system, credit bureaus aren’t exactly upfront about how they calculate your score. The Fair Isaac Corporation, or FICO, offers up a general breakdown of the five categories that make up your score, but it is otherwise tight-lipped.
In this post we clear up some common credit misconceptions so you can better understand some of the situations that can lead to bad credit.

Credit misconceptions:

  1. Everyone starts off with a perfect credit score
  2. Carrying a high balance is good for your credit score
  3. It’s a good idea to pick a credit card with added perks
  4. Ignoring credit problems will make them go away
  5. Credit counselling, debt consolidation and debt settlement are all the same thing

 

Everyone starts off with a perfect credit score

Life would be a lot easier if we all started out with a perfect credit score. In reality, you start out with no credit and work to build your reputation as a responsible borrower. It takes time and good habits, like paying your bills on time and in full each month, to establish a positive credit history and a good credit score.
The unfortunate thing is that you can wreck your credit score pretty quickly. Unforeseen life events like getting sick or losing a job can affect your income and make it harder to keep up with things like student loan payments or credit card debt.
Regardless of how financially responsible you are, these kind of negative surprises can happen to anyone. It’s a good idea to have a contingency plan and a low debt ratio (we’ll get into that in the next section) in case you find yourself unable to work for whatever reason.

Carrying a high balance is good for your credit score

Contrary to popular belief, you don’t need to have a lot of debt to have a good credit score. In fact, carrying a lot of debt can negatively affect your score because the credit bureaus will classify you as someone who can’t handle debt responsibly.
Credit utilization, or the percentage of available credit you’re regularly using, makes up roughly 30% of your credit score. That’s a big piece of the credit pie. As a general rule, you should avoid maxing out your credit cards and should only carry a balance that’s well below your limit.

It’s a good idea to pick a credit card with added perks

If you’re going to get a credit card, why not get one with travel rewards, shopping points and cash back programs? The problem is these kinds of perks distract from the high interest rates that many of these reward cards come with. This combination of savvy marketing and customer incentives can lead straight into a bad credit situation if you’re not careful.
These kinds of credit cards encourage you to spend more to earn more points and the high interest rates can make it hard to pay down a large debt. If you have a hard time making your monthly payments, you’re in danger of defaulting, which can put a big dent in your credit score.
Plus, if you frequently apply for reward cards to earn extra bonuses from gas stations or retail stores you’ll generate more inquiries on your credit report, which also lowers your score.
Stick with a basic credit card, compare interest rates and only carry as many cards as you truly need.

Ignoring credit problems will make them go away

It can be overwhelming to start tackling a large debt or a low credit score, but the situation can only improve if you deal with the issues head-on.
The first step to improving credit is finding out where you stand right now. That means requesting copies of your credit report and your credit score from both Equifax and TransUnion — yes, your credit report and credit score are two different things; and no, asking for copies of them won’t damage your score. You can find more info in our blog post on how to improve your credit score.
It’s also a good idea to stay on top of credit report errors that might be negatively affecting your credit score.

Credit counselling, debt consolidation and debt settlement are all the same thing

Credit counselling, debt consolidation and debt settlement are three things that can help you deal with a serious debt issue, but they all differ in important ways.
Credit counselling services are usually non-profit organizations that help people get out from under debt by offering budgeting assistance and money management education.
Debt consolidation means using one loan to pay off multiple debts. Whereas debt settlement companies attempt to negotiate with creditors on your behalf to close out debts by paying less than what is owed. Going this route can do significant damage to your credit score for a long time.

If you’re wondering how a less-than-perfect credit score will affect your car finance application, our Birchwood Credit Solutions team is here to help. Get in touch with us today to learn more about our flexible in house financing options.

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