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The Most Common Credit Misconceptions: Separating Fact from Fiction



Credit is a topic that can be difficult to navigate, particularly if you are new to the world of finance. It is not uncommon for people to have misconceptions or misunderstandings about credit, which can lead to confusion and potentially harmful financial decisions. In this article, we will explore six common myths about credit and provide you with the facts you need to make informed decisions about your finances. Whether you are just starting out with credit or looking to improve your credit score, this guide will help you separate fact from fiction and stay on the path toward financial success.


While having good credit is important for many aspects of your financial life, navigating the world of credit can be challenging. Unfortunately, there are a lot of myths and misunderstandings out there that can lead to confusion and mistakes. It is important to separate fact from fiction when it comes to credit so that you can make informed decisions about your financial future. Here are six common myths about credit and the truth behind them.


Tip #1 - Paying off your debts will immediately clear your credit report


While paying your debts is essential, it does not mean your credit report will be clear immediately. Your payment history is a history of payments, not just a snapshot of where you currently are. Credit reporting agencies like Experian look at your payment history over time, not just at one moment. Remember, you cannot change the past.


Tip #2 - Attending credit counseling will destroy your credit score


Attending a credit counselor's debt management program is not considered negative in the scoring models. However, if the credit counselor negotiates a lesser contractual obligation, the lender decides how it wants to report that. So, if your $500 monthly payment is refigured for $300, the creditor may either legally report that as $200 in arrears every month or reward you for not filing bankruptcy by saying the account is up to date. Although credit counseling does not influence your credit score, it is apparent on the report that you have been through or are currently in counseling -- and that is something individual lenders may not like. Or they might never know.


"Good credit is not just a number. It's a reflection of your financial responsibility and the key to unlocking opportunities for your future." – CL. Reddon

Tip #3 - Closing all your open accounts is best for your credit score.


While having too many open accounts can be a potential debt, most creditors want to see at least two or three active credit lines to prove that you can manage debt responsibly. The myth is that unused credit cards look ominous to potential lenders. The reality is that paying your bills on time and not being overextended is more important than having $5,000 worth of available credit on a card you are not using. We continue to evaluate this 'total credit limits' statistic and do not find it falling into one of those highly predictive areas. However, going wild and signing up for five credit cards during the holiday season could decrease your score.


Tip #4 - Having many inquiries will harm your credit score.


While it was once true that having many inquiries would hurt your credit score, in this millennium, credit agencies recognize a shopping mindset when they see one. If a batch of mortgage or car loan inquiries arrives within 30 days, credit agencies do not count them against your score. Outside of those 30 days, if a mortgage or car inquiry occurs 180 days ago and more mortgage or auto-related hits occur in the accompanying 14-day window, credit agencies still assume you are shopping for one item, and it does not affect your score.


Tip #5 - Checking your credit report will harm your credit score.


There are two types of inquiries: hard and soft pulls. A hard pull happens when someone checks your credit without your permission, such as a lender or a creditor. Soft pulls occur when you check your credit, and they do not impact your score. Using a company that promises credit reports as a benefit can turn this myth into a self-fulfilling prophecy because they are merchants in disguise. Citizens must go directly to the three bureaus if they want a soft pull.


Tip #6 - All credit reports are the same.


Most creditors nationwide report their information to all three major credit reporting agencies: Equifax, Experian, and TransUnion. However, the speed at which they update their records is different. Errors can occur in credit reports, ranging from incorrect personal information to accounts you never applied for. Over 85 percent of all credit reports have erroneous information.


Conclusion


It is crucial to have a clear understanding of credit and the common misconceptions surrounding it. Knowing the truth behind these myths can help you make informed decisions about your financial future and avoid potentially harmful mistakes. Remember that paying off debts may not clear your credit report immediately, attending credit counseling will not necessarily harm your credit score, having many credit inquiries may not hurt your score, and checking your credit report will not harm your credit score. Keeping active credit lines and checking your credit report regularly is also essential to ensure accuracy. By separating fact from fiction, you can take control of your credit and achieve financial success.

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