These common credit myths can lead to the same financial mess you would have if you were to spend your life savings looking for the Loch Ness monster
Let’s face it, myths are fun. Who wouldn’t long for a good sighting of the Loch Ness Monster, Bigfoot or a chupacabra?
However, myths involving your credit score and personal finances can cause big problems. Incorrect beliefs can send your credit score plummeting, leaving you unable to qualify for a lender’s lowest mortgage rate or car loan, or a credit card’s most attractive APR.
Experts say these are some of the most notorious myths that could send your score spiraling down the drain.
1. Myth: As long as I make my minimum payments on time, my credit is golden.
Reality: Not true. Outstanding credit balances can weigh down your score as well.
Gregory B. Meyer, community relations manager at Meriwest Credit Union in San Jose, Calif., says that’s because the purpose of having credit is not only to make payments, but also to pay things off over time. “Paying the minimum is the equivalent of running in place. Lenders see balances that hang around, not getting paid off, in a negative light. And they would rather lend to someone who is paying their obligations than someone moving them down the road a piece by making minimum payments.”A whopping 30 percent of your score is dependent on your balances, says Meyer. And balances that are kissing the credit limit affect your score negatively. “They can become the unwanted house guest who never leaves when you’re applying for additional credit. And can keep you from qualifying for credit or from getting the most attractive rates and offers,” he says.
2. Myth: If I pay off this collection, it will be removed from my credit report.
Reality: Nope. Meyer says if you pay a collection account, it will be reported as a closed or paid collection. “It is still a negative item. It’s not as negative as an open unpaid collection. But it lingers there to tell potential creditors that you have had some problems paying bills in your past.
“A collection can be on your credit report for seven years. A paid collection remains on for the balance of the seven years after payment. So if a collection has been on your report for two years and you pay it, it will show as a paid collection for the next five years,” says Meyer.
“Your score will start to bump up after you pay the collection. How much of a bump depends on your other credit issues like other payment history and debt-to-credit ratio,” says Meyer.
3. Myth: Only errors that involve amounts owed or paid off affect my credit score.
Reality: “Inaccuracies in basic information on credit reports occur and can affect credit scores more than most people might think,” says Kevin Gallegos, vice president of operations for Freedom Debt Relief in Phoenix.
He says you should verify identifying information such as your name, current and previous address listed, date of birth, Social Security number and “aliases” — other names such as names with or without a middle initial, and maiden names.
“Any inaccuracies, even those as little as a wrong middle initial, could leave you holding the financial bag for debts that are not yours or with a dented credit score because of the mistakes,” says Gallegos.
4. Myth: Zero percent deals are big money savers.
Reality: Zero percent offers, which typically offer no interest payments for a set period of time, may sound great, but only if you are uber-disciplined about paying the entire balance off before the promotion period ends.
But Meyer says beware. This is a consumer trap.
“If you are one day late with a payment, you immediately suffer penalty interest. The rate on the account will jump up, possibly to over 25 percent and the company may charge interest from the start of the financing,” he says. “Even if you only owe $1 at the end of the term, you will suffer penalty interest.”
Meyer says he had a client who bought a houseful of furniture on a three-year zero percent deal and made 35 payments on time. “The last payment made in December was two days late due to holiday mail, which can be late sometimes. The finance company sent her a bill for about $2,300 in penalty/back interest owed,” says Meyer.
5. Myth: Only strangers are interested in getting my personal information and stealing my identity.
Reality: Steve Rhode, a consumer debt expert, consumer advocate and money coach on the television reality show, “Starting Over,” says many of the clients he’s counseled on credit issues have had their identities stolen by family members, roommates and others close to them. In fact, the number of cases of identity theft involving known thieves is nearly the same as those involving stranger thieves.
“Someone close to you who has access to your personal information could easily leave you the victim of identity theft. The saddest cases are when the parent takes out credit in the child’s name and runs the debt up,” he says.
6. Myth: Shopping or banking online isn’t secure.
Reality: Robert Siciliano, an identity theft expert and certified security instructor for numerous industry associations, says that depends.
“It’s actually possible that the ‘e-tailer’ or bank where you do business is more secure than your computer,” he says. “The consumer is often the path of least resistance to fraud.”
That’s because not all online retail sites and banks are secure, which means consumers are sitting ducks for hackers hoping to steal your credit information or identity.
“As long as your computer has updated antivirus and spyware protection, you should be fine,” says Siciliano. “And don’t enter any personal information, including credit card numbers, unless a site’s address includes ‘https://’ in the address bar. The “s” means it’s a more secure site.”
7. Myth: A debit card is just as safe to use as a credit card.
Reality: Rhode says unlike credit cards, which have a credit limit and protection from fraudulent activity, a debit card is the equivalent of an electronic check that allows people to reach directly into your bank account.
“If you fall victim to fraud or an errant transaction that drains your checking account, you will have to wrestle with your bank and hope you’ll be issued provisional credit while the matter is investigated,” says Rhode.
By comparison, Rhode says credit cards give you the opportunity to review the transactions and lodge a dispute prior to being obligated to pay for a fraudulent transaction.