Even the most responsible person in the world who has never missed a payment could be missing a good credit score.
Why? Because it takes time to build a reputation, which is based on what you’ve done. The general guidance for creating a good reputation and credit score aligns with what one would expect: Live within your means in order to be able to make payments on time to whomever has extended you any form of credit. Establish a history of paying on time, and lenders will be more likely to want to lend to you.
Intuit recently acquired Credit Karma for $7.1 billion, a firm with a user base of over 100 million, with 37 million active monthly users taking advantage of their service to better monitor and build a credit score (among other services). People want to understand their credit scores, and it isn’t always easy to do so.
Here are some popular myths that have arisen about credit scores, the reality of where they stem from, and the actual effects they have on one’s credit score.
Myth #1: Paying interest on credit cards improves my credit rating.
Reality – People associate credit card companies profiting with their wanting to extend ever more credit to boost profits as long as the customer keeps paying the minimum balance.
In fact, paying on time improves your credit score even if the balance is paid down to zero. Though having active accounts longer can increase your creditworthiness, it is not necessary for them to be carrying a balance from month to month.
Myth #2: Checking my credit score hurts my credit score
Reality – Checking your own credit score does not hurt your credit score, and statistics show that people that do are likely to improve their credit scores.
No effect checks on your credit score:
Initiated by you – Checking on your own credit score
Initiated by company – “Soft check” by company requested to pre-approve a credit offering for you
When there is an effect
Initiated by you – “Hard check” by company requested to extend credit, such as a loan or credit increase – small negative effect
Myth #3: I should ask to be extended the amount of credit I need.
Reality – one of the metrics for your credit score is based on your credit utilization. If you ask for a credit increase (easiest to get when the credit utilization is lower), it will in fact further reduce the utilization. For example, if you have one credit card using $5,000 of a $10,000 limit, your utilization would be 50%. If that limit were increased to $15,000, your utilization would be reduced to 33%, which would improve your credit rating.
This would likely represent a hard check on your credit rating, which may reduce your score at the same time, but that change will only affect your credit rating for one year, and be less that you gained by changing the other metric. Of course, if you increased your spending at the same time, that could end up have an adverse effect and cause you to carry a higher balance.
Myth #4: I need a credit card in order to establish a credit history
Reality – The easiest way to establish a credit history is generally to get a secured credit card or loan, or a loan with a co-signer sharing the liability, and build your way up from there. However, a credit card is not required to establish a credit history. One alternative tactic is to request that your landlord or utilities provide a record of your on-time payments to credit bureaus.
A great reputation takes a lifetime to build, and a good credit report is no different.
Creating a lasting legacy should also involve providing guidance and cultivating values. There’s more to it than simply transferring financial assets to the next generation.
The professionals at Garden State Trust Company would be pleased to share some of their insights of what to expect and potential pitfalls to overcome.