Credit Management in the 21st Century
In today’s world, good credit is a necessity. Today, our credit score affects much more than our ability to buy a house or finance a car. Our credit score can also affect our insurance premium, our ability to rent an apartment, and even our ability to get a job.
Consumer FICO scores are calculated using the information found in your credit report, including the number of open accounts, how much debt you have, how many creditors have sent inquiries about your credit history, and how many, if any accounts have been sent to collection agencies.
Navigating the credit score maze can often feel confusing and overwhelming as we ask ourselves questions like, “Why did my credit score go down?”, “Should I apply for more credit?”, “Should I pay off my collection accounts? Or pay down my credit card debt?” It certainly doesn’t help that there are a variety of opinions out there, some accurate, others not, that serve to confuse you even more.
Here are some common assumptions (or myths and their truths) that many people make regarding their credit.
- Paying off a collection account will raise my credit score. Not necessarily. While collection accounts do get looked at during the credit application process, paying one off does not always raise your score. However, adding another line of credit, such as a credit card, can raise your credit score more than 20 points.
- It doesn’t matter how much I charge on my credit card as long as I pay my bill on time. Not true. Credit bureaus look at the amount of credit utilized, not just whether the bill is paid on time. So, while making a payment on time will always be important, it’s also important to keep your utilized credit to about 30%. Anything above that will be flagged and likely affect your credit score negatively.
- If I file for bankruptcy, I’ll never be able to buy a home. While it’s difficult to purchase a home within two years of a bankruptcy filing, if you have a decent credit score and a reliable job, you will likely be able to purchase a home. However, be aware that a bankruptcy will remain on your credit report for up to 10 years, making it likely that you’ll have to explain the circumstances behind your bankruptcy filing.
- I only need to check my credit report once a year. While experts used to advise consumers to look at their credit report annually, it’s probably a good idea to look at your score at least once a month. Many credit card companies provide their customers with free credit monitoring, which notifies you of any unusual activity that shows up on your credit report, such as a new account opened or a credit inquiry. If the service is offered, take advantage of it. It could save you a lot of headaches in the future.
While a credit score certainly doesn’t provide the full measure of a person’s credit-worthiness, it serves to provide a snapshot of where you’ve been. Don’t let an incorrect assumption mar your snapshot.