Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
Hey, Erica. What’s the biggest myth about credit cards? — Toni
Must I choose just one? After speaking with countless cardholders since the mid-1990s, I’ve heard some of the craziest “facts” about credit. Even more maddening, though, is that when reality is presented, some people simply refuse to accept it. It’s quite baffling. The following is a list of my most vexing credit myths, and what the truth really is.
- It’s better to carry a balance. Really? Well, it’s simply not true. Sure, a credit card company makes a profit on revolving balances as they charge you interest on the sum that you roll over to the next month. That, however, doesn’t make it better for you. Hanging onto a debt won’t improve your credit score (and in fact, it will knock it down if your balance nears your credit limit), and it will increase the cost of your purchases.
- Credit counseling affects your credit report and score. Now, this is just silly. Counseling is nothing more than meeting a financial professional and discussing your money and credit issues. The counselor will not turn around and make a report to a credit bureau, lender or anyone else, except perhaps the company they work for. If you were to go on the agency’s debt repayment plan, on the other hand, the bank you are paying through the service may indicate participation and report the activity.
- I can’t be sued for a debt if I don’t have any money. Sure you can! As long as the time frame is within the statute of limitations for lawsuits, anyone you owe money to can drag you into court and sue you for nonpayment. After all, even if you have no assets today, you could have some in the future (from a new job or an inheritance, for example). If they win the case, they will be able to collect for many years.
- Credit scores factor in income. Nope.While your place of employment may be listed on your credit report, you will not find any indication of the amount of money you make. Credit scoring models, such as FICO, only use the information included on a credit report to generate a number. Therefore, income is not a factor in credit scoring. Will a lender look at your salary when determining if you qualify for a loan? Sure, but the information won’t come from your credit report or have any bearing on your credit score.
- I have the right to settle my debts. No, you don’t. Even if you were to have the best, most compelling reason in the world to pay less, if you legitimately owe a certain sum, then that is what you are expected to pay. This is not to say that a debt settlement agreement can’t be arranged — sometimes it can — but that decision is entirely up to the creditor.
- Checking my credit report will hurt my score. Where this fable came from is a mystery, but to set the record straight, accessing your own credit report does not have any effect on your credit score. It’s what is called a “soft pull,” meaning it’s not being pulled as part of the application process for a loan or line of credit, which will be an inquiry on your report and can affect the score. Check your reports on an annual basis. It’s part of good credit management.
- It’s not my fault I’m in debt; I was desperate. I’m including this as a myth because the logic is so faulty. I hear it a lot, though. Many people believe that credit cards are necessary for emergency use, like a spare tire is for a car. Wrong. That’s the purpose of savings and insurance. If you pull out the plastic for every bump in the road, your next crisis call will probably be, “I’m up to my ears in debt. Help!”
So there you have it, Toni — seven flat-out wrong, but exceedingly common, ideas about credit. Believe them at your risk.
See related:Wage garnishment rules of engagement, State statutes of limitation for credit card debt, 10 common credit card mistakes, 7 things you must know about credit cards, Video: The basics of debt settlement
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