As society has evolved, credit building has become an increasingly crucial aspect of maintaining financial stability. Establishing a credit history can help you qualify for loans, credit cards, and other financial products with favorable terms and interest rates. However, navigating this world of credit-building can be tricky, and understanding the facts and myths about credit can make all the difference in your financial success.
Here are some common myths about credit building that you should be aware of, and the facts behind each:
Myth #1: You need to go into debt to build good credit.
Fact: While having a history of responsible credit usage can indeed boost your credit score, you don’t need to accrue debt to have a great credit score. Paying your bills on time and in full every month will demonstrate your creditworthiness without the need for accumulating debt.
Myth #2: You only need to worry about your credit score when you’re ready to apply for a loan.
Fact: Cultivating good credit habits should be a year-round practice, not just something you focus on when you’re in the market for a new car or home. Paying bills on time, keeping credit utilization low, and monitoring your credit score for errors or fraudulent activity is a continuous process that should be a priority.
Myth #3: Canceling credit cards will improve your credit score.
Fact: Canceling your credit cards, particularly those with a long credit history or high credit limits, can actually damage your credit score. Closing credit cards can lower your available credit limit, which can negatively impact your credit utilization ratio, making it appear as though you’re using a higher percentage of your available credit.
Myth #4: Checking your credit score will lower it.
Fact: Checking your own credit score is considered a “soft inquiry,” and it will not harm your credit score. In fact, reviewing your credit report regularly can help you spot errors, fraudulent activity, or areas where you can improve your credit habits.
Myth #5: Paying off a collection account will remove it from your credit report.
Fact: While paying off a collection account may stop collection calls or legal action, paying it off will not remove it from your credit report. The collection account will remain on your credit report for seven years, and it will impact your credit score during that time.
Navigating the world of credit building can be daunting, but understanding the facts and myths can make it easier. Remember that developing good credit habits, such as paying bills on time, keeping credit utilization low, and regularly checking your credit score, is a continuous process that can help you maintain financial stability and achieve your goals.