Since its creation in the 1980s, credit, credit reports, and credit scores have been a source of confusion for many. From understanding what credit is to what affects a credit score, there is a lot of bad or incorrect information out there.
To help you better understand credit, we’ve debunked five common credit myths.
Myth: Checking Your Credit Hurts Your Credit
This myth stems from a misunderstanding about how the credit bureaus track something called inquiries. The credit bureaus have what is called a “credit report” which is the record of everything you’ve done with your credit. Items like how many credit cards you have, missed payments on bills, and loans all show up on your credit report. Credit scores are made by pulling credit reports and running them through a formula to make a number.
When someone asks to look at a credit report, it is an “inquiry.” There are two types of inquiries: soft inquiry and hard inquiry. A soft inquiry happens when someone is requesting a credit report without the intention of giving out a loan based on the result. If you request a copy of your credit report for yourself, it counts as a soft inquiry. Other times a soft inquiry might happen include: using a credit repair service, a financial adviser looking at your credit situation, getting pre-approved for a loan, or a future landlord wanting to see your credit. Soft inquiries have no impact on your credit report or credit score.
Hard inquiries are when a bank or lender is asking for your credit report with the condition of loaning you money. This includes opening a credit card, getting a small loan, buying a car with an auto loan, or getting a mortgage. Hard inquiries show up on your credit report. Having one or two hard inquiries don’t have much of an impact on your score, but having a lot can. Many lenders view a lot of hard inquiries, especially close together, as a sign of financial trouble, and it will cause your credit score to drop.
So, checking your credit report doesn’t hurt your score at all. You can check it all day and it will have no impact. But if you are getting hard inquiries, like trying to open multiple credit cards or loans, it will hurt your score quickly.
Myth: Keeping a Balance on my Credit Card Helps My Credit
Some believe that you need to keep a balance on a credit card month to month for it to build credit and only to pay the minimum balance each month. Not only is this not true, it’s incredibly dangerous and a waste of money.
One of the factors on your credit score is your “credit utilization rate.” This looks at how much of your available credit you are actively using. Typically, having an auto loan or mortgage takes care of this factor on your credit score. It shows lenders that you understand how credit works and actively participate in it.
If you are putting a high balance on a credit card and don’t pay it off month after month, this might swing your credit utilization rate too far and start hurting your score. This myth is also dangerous because as you accumulate interest on your balance, you might find yourself unable to pay it off. If you miss a payment on a credit card, that will really hurt your score.
The rule of thumb when it comes to credit utilization rate is, if you have a loan of some sort, you are good and don’t need to worry about it. If you are debt free, use a credit card for occasional purchases and pay it off each month.
Myth: Never Get a Credit Card
A common piece of advice many parents give their young adults is to never open a credit card. This mis-guided piece of advice might come from a bad experience, like parents who used credit cards poorly and got into debt, or simple fear of something they don’t understand. But never getting a credit card is poor advice.
A major impact on your credit score is how long you’ve had a line of credit open. The longer you’ve had a line of credit open, and it’s been used responsibly, the better you look. Rather than shying away from a credit card, a good practice is to open one or two credit cards and keep them for a long time. Get credit cards with no annual fees and then pull them out on occasion for small purchases, to be paid off right away.
If you are looking for a no fee credit card, Pioneer can help with our VISA credit card. Along with starting your line of credit and overtime growing your credit score, you also earn Rewards points every time you use your card, which you can redeem on gift cards, merchandise, and vacations.
Myth: Building Credit is Hard
Whether you have no or poor credit, building your credit score might feel impossible. But, rather than resigning yourself to a life of bad credit, you can start today to build your credit score.
Building credit isn’t hard, but it does require patience and diligence. A good first step is to understand why your credit is low. Do you have negative items on your credit report, or just have nothing on it? Are you the victim of identity theft? Did you have to declare bankruptcy and never recover?
If you have a lot of negative items, one avenue to pursue is credit repair. Basically, any negative items on your credit report that have any type of mistake can be removed like they never happened. Even something like being one cent off or putting the wrong date on the item can get removed.
You should also start following credit building steps. Get a single credit card with no fees to use and pay off. Pay all of your bills on time and in full. If you have a lot of debt, consolidate it to a single loan.
If you are really struggling, you can always open a Pioneer Credit Builder Loan. How the loan works is that you open it for a set amount, but then that money is set aside as collateral for the loan. You make monthly payments like any other loan, and that positive payment is reported to the credit bureaus. The money you do pay is put into a Pioneer Savings account, earning interest while you work on this, and once the loan is all paid off, you get the money from the savings account!
Myth: Fixing My Credit is Expensive
There are a lot of services out there designed to help fix your credit, but at a fee. Many businesses revolve around credit repair and credit counseling, charging high monthly fees until you reach your credit goal or can’t pay for it anymore.
It doesn’t have to be this way. There are many non-profit services, along with financial counselors, who can help you with your credit for low or no costs. You can also learn how to fix your credit by yourself by doing research or attending financial classes. Everything a business would do to fix your credit, like credit repair, you can do yourself!
If you do want some guidance and assistance, you aren’t alone. Pioneer members get free access to GreenPath Financial Wellness, a financial counseling service. Their specialists can assist you with understanding your credit situation, setting a plan to grow your credit score, and achieving your goal. They also can help with debt consolidation and budgeting.
Learn more about GreenPath
Apply for a Loan