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  • Bob Brooks

Misunderstandings and Tips About Credit

Credit/debit/credit scores....are often misunderstood. There is a great deal of bad information floating around the internet. So I thought I would write about some of the top misunderstandings about the subject and share some tips.

Misunderstanding #1 - Debt of any kind can negatively impact credit scores

Installment loans where you have a set payment, a set interest rate, and a pre-determined pay-off date have a marginal effect on credit scores. Credit card debt, on the other hand, can have the biggest negative effect on scores.

Tip:  There are a lot of choices such as Prosper or Lending Tree for personal installment loans. Do your credit score a favor and refinance that credit card debt to an installment loan. It could do wonders for your credit score over time.

Misunderstanding #2 - Credit checks of all kinds can negatively impact credit scores

There are three types of credit checks. Soft inquiries are personal credit checks for informational purposes. These are credit checks you make yourself. These have zero effect on your credit score. There are hard inquiries. These are credit checks by lenders for the purpose of establishing credit. These have a small negative impact on your credit scores. Finally, there are third party entities that check your credit for other reasons than for credit. Any entity can check your credit as long as they have a permissible reason. This as no effect on your credit score.

Tip:  Check your credit often and stay on top of your information. Always monitor your credit files.

Misunderstanding #3 - A debit card has an impact on your credit

Although debit cards have Visa and Mastercard logos on them, they are nothing more than a method of payment and have no bearing on your credit.

Tip:  Always chose a credit card over a debit card (if you can). Charging on a credit card each month and then paying it off is a good way to boost your score.

Misunderstanding #4 - Paying off a credit card and then closing the account is good for my credit score

Paying off credit card debt is a good thing. However, it is best to keep the card open. Closing it removes the unused credit line. Your credit score benefits when you have an open credit line with no debt against it. It is called credit utilization. You want low credit utilization rates.

Tip: If you have an open credit card that you are not using, sign up for text alerts to alert you to an activity or a balance due. You always want to monitor your credit cards whether you are using them or not.

Misunderstanding #5 - A great score will get me low-interest rates

Yes, this is true on everything but credit cards. Even with a good credit score, you are looking at 14% plus interest rates.

Tip:  Don't believe credit card companies when they advertise a credit card for people with good rates. Shop around for the best rates. Try credit unions over banks for the better deals.

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