Insurance Risk and Credit Protection

Common Credit Myths

Everyone thinks they know a thing or two about credit; how to build your credit score, what hurts your credit score, etc. But be wary of credit advice you receive from friends, family, and co-workers, as many of the widely held beliefs about credit are actually myths. The following is a list of common credit myths and a little bit of truth on each one.

1. If I request a copy of my credit score, my score will go down. This is by far the most commonly believed myth about credit. It stems from some truth; a "hard inquiry" will drop your credit score for a short time, however a "Soft Inquiry" will not affect your credit score at all.
2. I have a bad credit score and I can never rebuild it. While it does take time, credit scores can be rebuilt. If you begin paying back loans on time and in full your credit score may creep back up. After a certain number of years of good credit history, your former debt will not weigh as heavily on your score.
3. Bankruptcy is the best way to get rid of my massive debts. In almost every circumstance this is not true. While there are some unfortunate situations where bankruptcy in unavoidable, the vast majority of the time it should be avoided. Filing for bankruptcy may stain your credit report for up to ten years and make it very challenging for you to qualify for loans of any kind. Talk to a financial adviser or credit counselor to see if there is a manageable way out of your debt before considering this option.
4. My credit is either good or bad, there's nothing in between. Credit reports are not split down the middle with one number. The standard rule of thumb is anything under a 620 credit score is considered poor, anything over 650 is a tier up, and anything over 700 is considered to be a fairly good credit score. Research shows that the most common credit scores fall between these two numbers in the 600-700 range.
5. If I move my credit card balances to another card or organization, I can hide my debt. This is not true, whether your debt is on one card or with 12 different lenders, it is still the same amount of debt and will be on your record.
6. My wife has great credit so we will be approved for our mortgage even though my credit is bad. If you are both purchasing the home, the mortgage company will look into both spouses credit reports, not rely on just one.

Hopefully this post helped to bring light to some of the most common credit misconceptions. Please feel free to leave comments or questions.

How is a Credit Score Calculated?

According to a national survey by 3 independent financial agencies, the most common credit score is 650 in America today. So how exactly is your credit score calculated? Your credit score is calculated based on your credit history in five different categories: payment history, amounts owed, length of credit history, new credit, and types of credit used. The categories are weighted differently because some aspects of your credit history are more important than others.

The first category that is weighted the highest as 35 percent is payment history. This category looks at all of your loan history to see if you make your payments on time, pay off loans in full, including your monthly credit card. As this is the most important category, it is crucial to use loans and credit cards wisely to have a good credit score.

The next category, which is weighted at 30 percent, is amounts owed. This takes a look at your current loans and how big they are. It is possible to have existing loans and a good credit score as long as you make all of your payments on time. However if you have too many loans or are in a large amount of debt other than a house, this will negatively affect your credit score.

Length of credit history is the next largest category weighing in at 15 percent. This category takes into account how long you have been using some type of credit or loans. This is why it is often helpful to open a credit card or two early on when building a credit score. Student loans are also an early form of loans that will be included in calculation.

The last two categories, new credit and types of credit used, are both weighted at 10 percent. Type of credit used looks at what types of loans you have and expects somewhat of a variety. New credit takes into account any new lines of credit that have recently been opened. Opening many new types of credit in a short amount of time does not reflect positively on your credit score.

Credit Card Debt

Are you struggling to pay off your credit card debt? You are not alone. Millions of Americans find themselves in heaping amounts of debt from credit cards every year. Credit card debt can be scary and the impact it can have on your future can also weigh on you, but it is important to keep your head above water and take care of the problem.

The first step you need to take is to stop using your credit cards. Set a budget to figure out exactly how much you need to spend each month to survive and take out the cash from your bank account. If you have bills that you usually pay with a credit card, switch them to a debit card if possible. This is a vital step to getting out of debt because the more you pile on a credit card, the more interest you owe, and the more trouble you are in. This step can be challenging but it is also very enlightening, as it will show you exactly where your money goes each month. Do not give into any temptations to go out for dinner, or grab a coffee. Keep your spending to a minimum.

The next step is to build up a security fund. This may seem counter productive but it will help ensure that you do not put any more large charges on your credit card. Start by trying to save about $1,000 before you put money toward your card. After this has been done put every penny you have toward paying of your credit cards. If you have more than one start with the smallest and pay it off first. This will help guide you and give you motivation as you work to pay of your debt. If you follow these steps and work hard you can start to pay down your debts fast.

How to Start Building Credit History

Building credit history is a key component to achieving a good credit score. Credit history is used to calculate fifteen percent of your credit score, with another large portion (35%) based on your credit history, or paying down your credit on time and in full. So how can you start to build your credit history? Here are a few tips that may help you build credit and you can start at any time.

1. Credit cards are usually a key player when it comes to credit history. They are the most common type of credit used and the easiest line of credit to be approved for. While some credit cards require a credit history before being issued, others (with a small line of credit) may be issued to first time credit users. You can apply for credit cards through your local bank, online through a credit card company, or even with local retail stores.
2. Once you have opened one or two lines of credit through credit cards it is vitally important to may your credit cards off each month. While it is acceptable to pay the minimum balance, it may not reflect as well in your credit score and you may be charged interest on the unpaid balance each month. Note that opening multiple credit cards at once usually does not reflect well on your credit use and history. Start slow so that your credit is easier for you to manage and you build good habits in paying off your balances each month.
3. Over time as you begin to create a history of being dependable with payments you may start to apply for other lines of credit, such as a car loan. The more types of credit you are shown to properly utilize, the stronger your score will become over time.

Remember that student loans, if you have or had them, are also a form of credit history. Not only do they play in to your credit score, but making payments on time and paying them off in a timely fashion may significantly help to increase your credit score. Student loans are typically as much as a car loan would be and therefore play a big role in credit history as well.

   

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