As a consumer advocate and personal finance expert, I spend a lot of time straightening out the facts. There are a lot of myths about credit scores.
Some myths are told by credit issuers because they want to make money off you by getting you into debt. Some myths are told by people trying to get you out of debt because they also have products to sell.
I’ve got five things you might have heard about credit scores, and if they are true or not. Knowing the truth can save you money.
1. Myth – Your credit score is NOT important
Fact: Your credit score is important to your financial future.
If you have student loans and want to consolidate and refinance your student loans at a lower interest rate your credit score is an important factor in what your interest rate will be.
Your credit score is also used for:
- some job applications
- car and home insurance rates
- mortgage rates
- car loans (I’m not a fan of car loans, but if you get a car loan you might as well get the best interest rate).
2. Myth – You can buy a house without having a credit score
Fact: You can buy a house without a credit score. However, you will limit the pool of lenders to pick from.
A lender will do what is called manual underwriting and will determine the mortgage rate based on your income, debts, and ability to pay back the loan.
Most lenders require a credit score to get a mortgage. By not having a credit score you’ve eliminated working with every lender that requires one.
If you don’t have a credit score, will a lender that does manual underwriting give you the best mortgage rate? I don’t know. But if you don’t have a credit score you’ll have no choice and won’t be able to shop around.
3. Myth – You can rent an apartment without having a credit score
Fact: You can, but your selections will be limited, and you may need a co-signer on the lease agreement.
You might also have to pony up a bigger security deposit and pay an extra month’s rent because your credit worthiness can’t be determined.
4. Myth – You need a credit card to establish a credit history
Fact: You do not need a credit card to establish a credit history.
If you are a renter, you can use a rent paying service that reports your on-time payments to the three major credit bureaus.
Note: If you don’t have a credit score when signing up for utilities, you may have to pay a higher security deposit to get the utilities turned on.
5. Myth – you have to take on debt to build credit
Fact: See #4. You can build your credit through a rental payment service.
Getting a credit card to build your credit score is the simplest way to build your score. HOWEVER – irresponsible use of credit cards is what causes many people to fall into debt. It’s a terrible situation and very hard to recover.
So you have to be VERY careful when you take out a credit card with the intent of building your credit.
A simple choice would be to use a credit card to pay for your gas or groceries once a month, and then pay it off.
Statistically, half of all people with credit cards carry a balance and don’t have the discipline or means to pay off the balance every month. If you can pay the balance of your credit card every month, you’ll be fine.
You could also consider a pre-paid credit card which will prevent you from spending money you don’t have.
I’ve been on both sides of the coin – having credit card debt, and now having gone 15+ years of responsibly using credit cards and paying them off each month. Choose what works best for you and your situation and money habits.
What do you think about credit scores? Contact me and let me know.