There are all kinds of misconceptions regarding credit and there are many opportunities for them to flourish given the overall lack of credit knowledge that exists relative to the complexity of the system. I have included five of the more common misconceptions below.
Misconception: I am better off not knowing my financial status
Don’t be a credit ostrich and bury your head in the sand. While ostriches don’t actually bury their head in the sand, they do duck their head low to the ground when they sense danger in the hope that their problem will go away. This describes the credit strategy of many, many individuals. When you ignore or otherwise choose not to know or understand the state of your finances, it costs you money. You will pay NSF fees because you don’t know how much money you have in your checking account. You will pay late fees because you don’t pay attention to the due date on your bills. Ultimately, your financial standing will suffer.
Misconception: My credit score does not matter
Yes, credit scoring is an imperfect, somewhat confusing system, but if you want to buy a house, finance the purchase of a car, obtain a credit card or complete virtually any other type of credit transaction, the first thing any financial institution will do upon receiving your request is run your credit report. Some will take the time to understand all the issues and perhaps even get to know you a little bit better in order to weigh all the factors, but most lenders will flat out reject credit requests of any kind from a person with impaired credit, regardless of any extenuating circumstances. A poor credit score can actually prevent you from buying a house or financing a car. Perhaps worse yet, today’s lending environment will still allow some individuals with poor credit scores to purchase a home or finance an automobile purchase, but force them to pay dearly for the privilege. This so-called “predatory” lending practice clearly perpetuates bad habits and can make tenuous financial situations even more prone to deterioration due to extraordinarily high interest rates and the associated monthly loan payments.
Misconception: I always pay my bills = My credit is great
Regularly paying your bills on time is a great start, but people are often surprised to find that their ability to obtain credit is impaired even when they have a strong payment record. Several factors other than your timeliness can add or subtract from your credit standing, including the amount of debt that you carry relative to your income, the frequency with which your credit report is run, and the amount of existing credit you already do or don’t have.
Misconception: I thought it was acceptable as long as I paid the fee
Many people are under the mistaken belief that if they pay an NSF fee, for instance, it is okay to bounce checks; or, if they are willing to pay a fee associated with making a late loan payment, the practice of paying late is acceptable. The fact is that many fees are established in order to discourage a certain behavior from occurring. Often times, fees are a precursor to a negative mark on your credit report.
Misconception: I have a steady job so I can spend as much as I want
What about tomorrow or the next day? Life is full of unforeseen circumstances. Fortunately, some are of the positive variety, but for the negative type, such as losing your job, unforeseen circumstances spell immediate trouble for someone who has not made any contingency plans. In this situation, assets and income go away in a hurry, but liabilities and debt not only stick around, they grow disproportionately as your inability to meet your responsibilities continues. Your hard earned, good credit standing can change dramatically within a matter of 30 days if you ever allow your debt obligations to outpace your ability to meet those obligations…and, it only takes one occurrence before your credit rating is impacted negatively.
You can begin to improve your financial standing today. If you have finished reading this article, you are well on your way. The rest is up to you.
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.