According to the Federal Reserve, consumer debt has now reached an all-time record high of $2.75 trillion. Credit history is becoming an increasingly important factor in your financial life. It can influence the rate of interest you’ll receive for a car loan to whether or not you will qualify for a mortgage; and everything in between. It may even play a role in helping a potential employer decide whether or not to offer you a position with their company. Not only can credit affect your financial situation, it can even affect your personal life. Yes, some folks are now asking their dates about their credit scores!
One would think that the majority of people would be fairly savvy about credit since it affects so many important areas of our lives, but that is not the case. Since many myths and much misinformation abound on this subject, I would like to review a few of the most common misconceptions in an attempt to preclude any further confusion.
• Annual income and overall net worth have absolutely nothing to do with your credit score. Your credit score is mostly determined by your record of paying back credit card debt and loans on time, along with any collection actions, civil judgments, or tax liens lodged against you. And whether or not you have ever filed for bankruptcy.
• Paying off your mortgage and/or car loan early will not have any effect on your credit. While it may be wise to do so, unfortunately, there is no benefit for an “acceleration of payment” from the perspective of your creditworthiness.
• Making payments early on credit card charges will not improve your credit score. There is nothing on a credit report that indicates when a bill is paid, only whether or not it is paid on time. The same is true for paying off and cancelling/closing credit accounts. In fact, sometimes this can work against you and actually hurt your score.
• The best and surest way to improve a credit score is to systematically pay down credit card debt in a timely manner. Start with the account that charges the highest interest rate. Also, a good “rule of thumb” to practice is never use more than 10% of the credit limit on any of your accounts.
• Potential employers do not look at your credit score. Actually (in states where it is legal) they rely on your credit history during the screening process. They do not have access to your actual credit score. According to a human resource survey, it was determined that only a little more than half of employers are using an applicant’s credit history in the hiring process. And finally……..
• Believe it or not, interviews with 50 single “daters” under the age of 40, all across the United States, revealed that one of the biggest factors affecting dating decisions today is credit scores. To some it was more important than a good job, shared interests, and physical chemistry. Wow, how times have changed!