Credit building myths are almost as rampant as flat-belly teas. Most myths derive from assumptions that seem to make sense, but just simply aren’t true.
Myths appear and spread because people receive information from different sources that are misinformed themselves. Today we’ll be debunking five credit-building myths that may help you start on a good note or rebuild from a misguided past.
Happy credit building!
#1 Spending more will build more
Myth:
It’s often assumed that if you spend more money on your credit card, you’ll be rewarded with more points on your credit score. Although, in theory, this sounds reasonable, it’s not true.
Truth:
Credit card companies don’t see you as more creditworthy if you spend more. This assumption is dangerous and can really mess up your finances. The real truth is that you’ll be more rewarded for spending less.
It’s best to keep your credit utilization below 30% across all of your credit card accounts; spending more than that only negatively affects your credit score. Say your credit card has a limit of $1,000; to remain in that 30% range, you’ll want to spend a maximum of $300.
If you want to build a good credit score, your focus should remain on your credit utilization rather than your spending. Credit utilization has the second-biggest influence on your credit score.
Suppose you're spending exceeds 30% utilization because of your expenses. In that case, you may want to apply for a higher credit limit, open a secondary credit card, or pay more of your bills using a debit card.
#2 You can’t get credit if you don’t have credit
Myth:
You need credit to build credit is thrown around all the time. Many people don’t realize there are better ways to build credit that don’t involve the risks of a credit card.
Truth:
You can totally build credit without credit. There are several ways to start building credit if you don’t have any. Here are three to get you thinking:
1. You can become an authorized user on someone else’s credit card:
If your parent or loved one is a responsible credit card user, then you may want to ask them if they’d make you an authorized user on their account. Being an authorized user means that your name will be attached to someone else’s credit account.
As an authorized user, you can receive a card of your own (or not) and be seen as someone responsible for the bank account. You’re not obliged to pay the credit card bill or any debts, but the credit card activity will be accounted for on your credit report.
You’ll want to be sure of two things before you go down this route:
1. Check that the credit card issuer reports authorized users to the credit bureaus.
2. You trust the account holder to make sound financial decisions and build a good credit history.
Being an authorized user is a great way to start building credit if you don’t have any. Just remember that if the account holder doesn’t make payments on time or goes above 30% utilization, it can reflect poorly on you. You’ll want to fully trust that the account holder will make sound financial decisions for both of your credit reports.
2. You can use a debit card that builds credit:
Extra is a debit card that helps you safely build credit without already having any. By connecting the Extra card to your checking account, you can go about your regular spending (without a credit line) and start to build credit.
Extra reports your everyday purchases to credit bureaus as credit-worthy at the end of each month.
For a complete understanding of how you can build credit with a debit card, check out How Does Extra Work?
3. You can use student or secured credit cards:
Applying for a student credit card may be a viable option if you’re a student. Duh!
As a student, you’re more likely to be approved for student credit card programs, which often come without annual fees. Remember that being a student doesn’t guarantee you’ll be approved; it’s best to contact the card issuer and ask what requirements they have.
If you aren’t approved for a student card, you can also look into secured credit cards. Secured credit cards require a cash deposit. Sort of like a gift card or debit card, you deposit a certain amount into the account, which becomes your spending limit.
Secured credit cards are a fine option, but not the best.
Extra debit card makes depositing funds into a separate account a thing of the past. By connecting the Extra card to your bank, you can avoid transferring funds and just swipe.
#3 You should always carry a balance
Myth:
Oh no, you’ve heard that carrying a balance from month to month will help you build credit. The maintaining a balance myth is dangerous and is not based on any real evidence.
Truth:
You should pay off your credit card statement in full each month if you have the funds to do so.
Companies that create credit-scoring models like FICO and VantageScore don’t grant you extra points for carrying a balance month to month, so it’s better not to risk it.
It’s easier to keep records and feel at ease when you know nothing is lingering over your shoulder from the previous billing cycle.
Learn more about why Carrying a Balance Doesn't Build Credit.
#4 It takes a long time to hurt or help your credit score
Myth:
Many believe that it takes a long time for your credit score to take a negative turn or positive turn. It is commonly thought that it can take years or even decades to make a difference in your credit score.
Truth:
Hurting or helping your credit score doesn’t take very long, and your actions can impact you sooner than expected.
One missed payment can hurt your credit score immediately, and the wound doesn’t heal quickly. A missed payment can stay on your credit report for up to seven years, depending on how you decide to handle it.
It doesn’t take multiple slip-ups to build a bad rep, and the credit bureaus may not be as forgiving as your high school frenemies.
In the same respect, bureaus can recognize your good deeds just as quickly as slip-ups. The good and the bad don’t cancel each other out, but they change your circumstances.
Lowering your credit utilization, reporting an error, or asking for a late payment removal letter can appear on your credit report within about 30 to 45 days. There are some quick-ish fixes when it comes to cleaning up your credit score.
You can do some significant harm to your credit score in an instant of unconscious swiping, but remember that thoughtful actions also have a quick ROI.
#5 You can’t come back from a bad credit score
Myth:
This myth is pure hater energy. You can come back from anything with time, dedication, and thoughtfulness, especially a bad credit score.
Truth:
Although mishaps in your credit history have long-term consequences, you can always make a comeback. So where should one begin when cleaning up their credit score?
We got you:
Dispute errors on your credit report: If a mistake is made on your credit report, disputing the error can help you bounce back.
Keep an eye on your credit utilization: Keeping focused on staying below 30% utilization will slowly but surely help you come back from a bad credit score.
Use Extra: You can stop adding to the problem by avoiding credit cards. The Extra debit card helps you safely build your credit without the temptation of overspending.
Get rent or utility payments reported to bureaus: Yes, paying rent builds credit. If you’re a good sport about paying rent or bills on time, you should see if your landlord, property manager, or leasing company reports payments to the bureaus (yes, leasing a car can build credit too). If your payments get reported, then you’re in luck!
Get a credit builder loan: These loans are literally designed to build your credit (look into them!).
Become an authorized user: Whether you have no credit or are trying to build back your credit score, becoming an authorized user is a viable option.
Debunked!
Now that we’ve debunked some major credit-building myths, you can get back to focusing on what’s real.
Remember that your credit utilization ratio, reported rent payments, and responsible car leasing can all play a role in your credit score. You should always look for new and more efficient ways to build or repair your credit; just be vigilant for myths and fibs.
We get it; knowing what’s true or not can become frustrating; just know that the Credit Wizard is always here to help.
