Credit is a concept that many Americans struggle with. Although various theories exist, the most effective way to build credit is to make timely payments and keep the balances low.
Here are six common credit myths that you should be aware of:
1. You have one single credit score.
Although the three major credit reporting agencies use similar variations of the FICO score, there are dozens of different types of credit scores using models developed FICO, VantageScore and others. In some instances, creditors have their own distinct formula to calculate your credit score. As a result, you can’t assume a particular lender is using a particular score.
It can be helpful to inquire with the lender about the qualification criteria prior to applying.
2. If I cosign a loan, I am only responsible for 50% of the outstanding balance.
Unfortunately, co-signing for a loan puts you in a position to be the “go-to-guy” if the primary borrower defaults. This means that you will be responsible for the entire unpaid balance that remains on the loan.
Before you make the decision to sign on the dotted line, bear in mind that the lender more than likely is requesting a co-signer because the applicant poses too much of a risk, either as a result of past credit issues or a lack of credit history.
3. Debit cards will build my credit.
Many are led to believe this assertion because their financial institution may have required them to undergo a credit screening in order to become a member. (This is not uncommon with credit unions). However, debit cards bear no impact on your credit because the activity is not reported to the three credit bureaus. The exception to this rule is the negative marks that can result if your account is overdrawn and sent to collections if deposits to clear the negative balance are not made in a timely manner.
An alternative to build your credit is a secured credit card. They typically require a security deposit, but operate like credit cards.
4. As long as I make timely payments, it’s OK to rob Peter to pay Paul.
Timely payments are not the only important factor used to determine your credit score. Your total revolving debt can still drastically lower your credit score if it is too high. Simply robbing Peter to pay Paul (using one form of debt to pay down another) just shifts the debt around and the outstanding balances will continue to increase.
A more feasible solution is to cut your variable expenses, which will free up funds to pay down your debt obligations. If you cannot afford to do so, contact the creditor to inquire about temporary relief options or other arrangements that may be available to you.