You know your credit is an important part of your financial life. Indeed, a number of people, from bankers to insurers to landlords, use your credit score to determine your financial fate. From higher interest rates and insurance premiums to paying a higher security deposit for a rental, a poor credit score can cost you.
It’s important to understand how your financial actions impact your credit score. Unfortunately, there are some rather persistent myths floating around out there. Here are 7 credit myths — and the truth:
Checking Your Own Credit Score will Harm You: There are plenty of people that still worry that checking their own credit will harm their scores. However, this isn’t the case. You can check your own credit, including your credit score, as many times as you want, and it won’t impact your score. You are entitled to know where you stand, and you won’t be penalized for checking your score.
The only time a credit check affects your score is when you request that a lender or other financial services provider check your score, usually (but not always) because you are applying for credit.
Closing a Credit Card Account will Raise Your Score: Actually, in the short-term, closing that credit card account can actually hurt your credit score. This is because your score includes credit utilization and your available credit. If you close a credit card account, all of a sudden, you don’t have as much available credit. If you still have balances on other credit cards, it immediately boosts the ratio of used credit to available credit. A higher credit utilization can lower your credit rating.
Paying Off Your Debt will Immediately Raise Your Credit Score: While paying down your debt can help your credit rating, it doesn’t usually do so immediately. It can take anywhere between 30 and 90 days for your credit score to begin to improve once you start paying off debt. Realize that your score will improve further if you build a longer history of lower debt. But you won’t see immediate changes, especially large ones, just because you pay down your debt.
As Long As You Pay Off Your Cards Each Month, You Will Have a Good Credit Score: This isn’t always true. In some cases, if you consistently come close to maxing out your credit cards, you could be dinged a bit on your credit score, since your report will show a consistently high credit utilization rate. This is especially true if creditors report to the bureaus during a part of the month that your credit card balance is high. Also, realize that other factors, such as a short credit history, or the presence of “undesirable” loans (like payday loans) on your credit report can hold your score back a little.
You Can Charge Whatever You Want on “No Limit” Cards: Even though some credit cards don’t have pre-set spending limits, it’s important to realize that these aren’t blank checks. At some point, you are likely to be cut off. Also, realize that many cards that don’t have pre-set limits are actually charge cards; you have to pay those off each month, regardless. As a result, your de facto limit is what you can afford to pay off every month.
ID is Required when You Use Credit Cards: According to Visa and MasterCard, your signature on the back of the card should be enough for the stores. While some stores request to see your ID as a security measure, this isn’t required by credit card companies and issuers. Also, note that writing “see ID” on the card doesn’t make it valid. Credit card payment processors actually want you to sign the card.
Your Credit Card Won’t Show Up on Your Report Until You Activate It: Unfortunately not. Your credit card will actually show up a couple of days after you are approved. Whenever the credit card issuer reports the approval to the credit bureaus is when it shows up — activated or not.
Janet writes about personal finance and credit cards for Credit, Eh, the blog of Credit Cards Canada, a site offering access to the best Canadian credit cards.
Photo Courtesy of Images_of_Money