Garnell Shumate wants to buy a home in 2011, so she works hard to maintain a good credit score. Each year, the Hackensack, New Jersey, resident requests a copy of her credit report from each of the three major credit reporting agencies and makes sure to dispute any items that are incorrect. â€śThe goal has been to pay down the cards with highest interest and work my way down,â€ť says the 41-year-old owner of an online dog clothing consignment shop. Shumate understands that the ability to purchase a home is largely dependent on her ability to manage debt.
If you, like Shumate, plan to make a big purchase in the near future, itâ€™s important to understand all the factors that affect your credit score. You also need to be able to separate fact from fiction. Below are a few common myths about credit and debt management.
Myth: If you have a good credit score, you donâ€™t have to pay attention to whatâ€™s in your credit report.
Reality: Read and understand whatâ€™s in your credit report. A mistake could cost you the best rate on a loan or cause you to be denied. It could also make you a target for identity theft. Look at the accounts carefully and make sure theyâ€™re yours,â€ť says Liz Weston, personal finance columnist for MSN Money and author of Your Credit Score, Your Money & Whatâ€™s at Stake: How to Improve the 3-Digit Number That Shapes Your Financial Future (FT Press; $18.99). If you see an account that is not yours, dispute it. â€śAsk for validation to prove the debt is yours. If they canâ€™t prove it, they have to remove it. If youâ€™re ignored, see a lawyer with knowledge of credit card laws,â€ť says Weston.
Myth: Credit inquiries will ruin your score.
Reality: â€śCredit inquiries donâ€™t matter as much as rumored,â€ť says Weston. â€śYour score is impacted by about five points, but then it fades quickly in a few months.â€ť A â€śhard inquiry,â€ť which remains on your credit report for two years, occurs when you apply for credit or a car loan or open a bank account. A hard inquiry will lower your score, but only for the first year that itâ€™s on your report. A â€śsoft inquiryâ€ť occurs when you yourself, a prospective employer, or a lender with whom you have an existing relationship checks your credit report.
Myth: Bankruptcy will solve all your credit problems.
Reality: â€śBankruptcy is the single worst thing you can do to your credit, so call [creditors] about a solution first,â€ť says Weston. Chapter 7 bankruptcy remains on your report for 10 years and Chapter 13 for seven years. Your credit score can drop by as much as 300 points.
Myth: Youâ€™re safe as long as you pay the minimum.
Reality: Credit utilization is important. FICO credit scores look at balances reported and available credit. The higher oneâ€™s percentage of credit used, the more damage it does to his or her score. â€śPaying the minimum may put you in good stead with the credit card company, but thereâ€™s still an unpaid balance over time, which affects your score,â€ť says Barry Paperno, consumer operations manager for myFICO.com. Experts advise using as low a percentage of your available credit as possible, but the ideal percentage is below 10%.