Credit management is more important than ever. Just about every major purchase you ever make is going to be impacted by your credit score.
The IRS has even stepped in with new credit and debit reporting laws hoping to reduce the tax gap.
Understanding your credit report is vital to your business, particularly when you are just starting and need start-up capital.
If you’re like most people, you have heard a lot of things about credit and your credit score. Sadly, most of the things people hear aren’t true. There are tons of myths and false ideas floating around.
These are common beliefs about credit scores but they are all myths you must be aware of.
Prepaid Credit And Debit Cards Boost Your Score
Companies that offer prepaid debit and credit cards do not report to credit bureaus so they do not impact your credit.
If you are in a situation where you need to build or rebuild your credit then think about a secured credit card. These cards require some type of collateral to obtain but as you use them responsibly your credit score increases. Before long you will find yourself obtaining unsecured credit cards.
With secured credit cards, you’ll have to put a cash deposit down, usually between $50 – $500. They have much lower limits, but they are reported to the credit bureaus. If you have an awful credit score, this is a quick and simple way to give it a boost.
Paying Off Negative Debt
Many people are surprised when they pay off a loan that has gone to collection only to find it is still on their credit report two years later. Your credit report encompasses your credit history. Positive and negative entries can remain on your credit report for up to 10 years. To avoid negative debt showing on your credit report, here are tips to avoid business debt and bankruptcy. Make sure to that when you pay off the negative debt, know that it will not automatically disappear from your report.
Here are some other factors to consider:
- Credit Inquiries: Despite popular belief, not all credit inquiries impact your score. The two types of inquiries are hard and soft. Hard inquiries are done when you apply for a loan or credit card. These can impact your score but usually only by a few points. Soft inquiries are run when you get those pre-approved credit offers or you pull your credit report. These do not impact your credit.
- Closing Credit Accounts: A common misconception is that closing credit accounts you don’t use will increase your credit score. This action can actually decrease your credit score. Having large amounts of credit you are not using looks better on your credit report that only having a few credit cards you use heavily.
- Certain Unpaid Bills: While it is true that not all paid or unpaid bills will appear on your credit report, this is completely up to the discretion of the credit company. Mortgages, credit cards, and property management companies commonly report all activity to credit agencies. If you don’t know, ask if they report to credit agencies. Another way to avoid this unknown is not to pay your bills late.
Join Credit Report
This is one of the most common myths that I hear. A lot of people think if you’re married, then you both have one credit score or that you can attach your spouse to your credit score, which will help boost their score.
Each person has their own credit score. Credit reports are linked to Social Security numbers. Even if you’re married, you both have individual numbers.
Although, the items you buy together (i.e. house, car, and credit cards) will impact both credit scores. If you miss a payment, both scores are going to be hit.
I Pay My Bills So I Don’t Need To Check My Credit
This is a dangerous misconception to have. Even if you have never missed or been late with a payment it is vital to check your credit annually. Companies make reporting errors and knowing your credit report will alert you to fraud.
- A Large Salary Increases Credit Scores – Large salaries are not the yellow brick road to high credit scores. Paying your bills on time and actively managing your credit is what keeps your score high. It is extremely easy to make large amounts of money and have poor credit.
- A Large Savings Account Increases Credit Scores – Bank accounts such as checking and savings are not reported to credit agencies and have no impact on your score. Income from employment, child support, or alimony does not reflect on your credit either.
Where To See Your Credit Report
Knowing what is in your credit report is one of the first steps to sound financial management. There are three agencies that monitor and report credit to lenders.
Knowing the common myths and misconceptions about credit scores and reporting will help you to better manage your personal and business credit. This will make acquiring the credit necessary to run a successful business much easier. Monitor your credit report at least annually and pull from all three bureaus to get the best information.
Source: Good Financial Cents / Featured image by freepik