Understand credit and your control

I’ve observed there is a consistent theme of credit rumours roaming the web. Myths are easy to identify because there’s a lack of financial knowledge, specifically related to debt, namely debt literacy. To understand debt you need to understand your credit.

There’s a myriad of misconceptions about credit

At times, I’m amazed that these credit myths still exists or that people still believe them to be true. No matter if you are a guy or doll, I know you thought one of the five credit myths below were true. I can understand why. The internet, as useful of resource it can be, can do more damage than good. There’s usually more rules of thumb touted as the “right” way to managing your money. How many times have you heard pay off your debt before building an emergency fund? If you are new to me, then you should know this about me: I take a balance and holistic approach to finances with a little spice. My quick answer is for you to do both. And I show you how in my book. Although, I provide you with tips and strategies to paying off debt in my book and understanding your credit (hint: I’m offering a free chapter from my book to the right of the screen. And it’s all about understanding credit, credit scores, and paying off debt).

No longer do people research for the answer because if it pops up on a Google search, then it must be true. Keep in mind, I’m not against internet searches, but there’s a lack of discernment. Take a look at the five credit myths below and let me know if you have thought any of these to be true.

Credit Myth 1: Employers use your credit score as part of the employment screening process.

They use a modified version of your credit report. They never see your score. Employers are looking to see if you have any liens, judgment, bankruptcy, or payment history that might influence their decision to hire you. Your credit score is provided by Equifax, Experian and TransUnion. The employers would have to get your score from one of these companies. And none of them provide your credit score as part of the employment screening process.

Credit Myth 2: Marriage merges your spouses credit with your credit.

Think of it like Social Security. Will your Social Security record merge with your spouse’s record? No. And neither will your credit. If you accumulate debt together and your name is on the loan, then it will be on your credit report. If one of you was financially irresponsible before the marriage, then that credit report history will impact you as a couple. When you purchase assets together (jointly), such as a car or house, or applying for a joint credit card, both credit score will be considered. I strongly suggest before you get married you take an inventory and watch out for the financial crap that might impede on your marriage. You may have to do a “work-around” where only one of you (the one with the good credit) will purchase the car in their name. But where both incomes will be considered, such as mortgage loan, then both credit scores might be considered.

Credit Myth 3: Never close an account.

The fear with closing an account is that it dings your score. Let’s dig into this a little further. Assuming you have good credit and different types of credit (10% makes up your credit score) such as student loan, credit card, car loan, mortgage, etc., you might want to consider closing down a credit card, assuming you have more than two. This requires you to know exactly your debt-to-credit utilization ratio is: how much you owe compared to your total credit limit. If your total credit limit is $30,000 (divided equally among three credit cards)and you have $5,000 balance you may want to consider closing one of your 3 credit cards, for example. The card you will want to close will the one with the shortest history and zero balance. Of course if you are using a high amount of debt, then do not close your account as it will increase your ratio. Personally, I do not see why someone needs more than two credit cards. If you don’t want to close a credit card, you don’t have to.

Credit Myth 4: Checking on your credit will hurt your credit score.

When you check on your credit score, it is considered a “soft inquiry” rather a “hard inquiry.” Hard inquiries affect your credit score when a prospective lender is checking up your credit report. However, when shopping for a mortgage or auto loan, the FICO scoring model recognizes that if you are shopping around within two or three weeks, it is seen as you are shopping around for one car or one mortgage loan. Soft inquiries do not affect your credit score. So, go ahead and check on your score. J

Credit Myth 5: Preapproved offers affect your credit report or score.

I know there are people who think it does, but it doesn’t. Here’s how these unsolicited offers work: a credit card company (and sometimes insurance companies) have a certain criteria and will ask one of the credit bureaus to provide a list of consumers who meet the criteria. Here’s the warning: if you do apply for the credit card, then your score will be affected. It’s now a credit inquiry made by the credit card company. Preapproved offers do not guarantee you will be accepted.

Out of these five credit myths which one did you think was true?