Common Pieces of Bad Credit Advice

OCT 07, 2010

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Bad Advice #1: Credit counseling has an affect on your credit scores

Why its Wrong #1: Credit counseling is a process where counselors negotiate more manageable payment plans with your creditors. While it may be notated on your credit file in some form, it does not impact your credit score and it will be removed upon completion of the program. Notations of credit counseling may alert potential lenders of a credit concern, but most lenders look at the bigger picture. Some even see consumer counseling as a positive sign and commitment to make lasting changes to a persons credit habits.

Bad Advice #2: Don’t apply for a loan (or credit card) it will hurt your credit scores!

Why its Wrong #2: It’s true that applying for credit, also known as a hard inquiry on your credit report, can cause your credit score to drop by approximately 10 points, but that should not stop someone from obtaining credit they need. In fact a balanced credit file will have a mixture of credit accounts and managing these accounts in the long-term can benefit your credit score. What consumers should keep in mind is to refrain from applying for any additional credit solely for the purpose of mixing it up . However, this advice does hold weight if they will be applying for a major loan (such as a mortgage) in the upcoming months. In that case, creditors may frown upon requests to take on additional debt.

Bad Advice #3: Help out your friend or family member improve their credit scores by co-signing their loan.

Why its Wrong #3: While sometimes a friend or family member may need your help because their own credit does not allow them to qualify, you have to realize that as a cosignee you are 100% responsible for repayment of the debt. If the other party fails to pay or misses a payment, that black mark shows-up on your credit report too and will damage your credit score.

Bad Advice #5: If you have a large chunk of money in savings, use it to pay off your credit card balance.

Why its Wrong #5:  Before you make a large payment towards your balance on a credit card its wise to contact the creditor, because they may take the opportunity to reduce your credit limit. Reduction of your credit limit could potentially affect your credit utilization ratio which has a significant impact on your credit score, or it may simply be undesirable. Ask your creditor what they will do if you make that large of a payment, and if they cannot make you any promises, consider shopping for a new company.

Bad Advice #6: You can afford to buy it because they don’t require you to make payments for a whole year.

Why its Wrong #6: Beware of installment loans that boast you are not required to make payments for X amount of months. They can indicate to creditors that you are not able to make payments now, and therefore are not financially stable.  Or worse, if you miss your payment after the no payments required period , these finance companies charge huge penalties and can retroactively charge you interest as if you had financed the purchase originally. This is how these companies make money, they count on a small percentage of people not making the payments after the no money now, pay later  financing programs.

Bad Advice #7: If you are carrying a balance on a 0% interest credit card and the introductory rate is going to expire, just open a new card with the same policy and transfer your balance.

Why its Wrong #7: It’s best to create a debt repayment strategy. Continuously rotating your debt to a new credit card can slowly erode your credit score, which benefits from proving a long account history and a low credit-utilization ratio.

 Bad Advice #8:  Pay cash for your vehicle, then you won’t owe a penny.

Why its Wrong #8: Your credit score will benefit from having an installment loan with a positive history. So even if you could afford to pay cash for your vehicle its a good idea to take out a small loan, especially if you qualify for low or no interest financing. With interest rates at historic lows, auto loans and leases are very attractive. For new college grads or if you’re trying to build a strong credit history, an installment loan can prove your responsibility to the credit bureaus by paying it off and your score will likely improve. If you always pay cash the credit bureaus wont have enough history on you and your score will suffer.