After working in a financial institution where I did some underwriting and credit score analysis, here is a list of 4 things that I would hear on a regular basis from my customers about credit and credit reports. Each of them are myths and NOT true.
1. The more you use your credit card, the more you build your credit.
Some people will get a credit card just to pay for the gas in their vehicle. By using the card and paying it off, they believe that this is building their credit. This is FALSE! The credit bureaus do not keep a history of your spending habits. When you look at a credit report, you’ll see: 1) the credit lines that you have open, 2) how long you have had them, 3) the balance of your credit card in relation to the limit of the card, and 4) if you have ever been late. These four items are THE MOST important factors regarding your credit score. A credit report is only a snapshot in time, therefore using your credit card to simply build your credit, won’t work. In fact, it could work against you. If you have a credit card with the limit of $500 and you gas up your car, go out to dinner, and buy something at J. Crew, you’ll probably be pretty close to hitting that limit. Let’s say you had spent $400. If you were to look at your credit report it would appear that you were maxing out your line which would then lower your credit score. However, if your limit was $1,000, it wouldn’t be a big deal. One key thing to remember, if you are going to pull your credit, try and make sure your credit card balance is under 50% of the limit.
2. Debit cards, cell phones, rent, cable bills, and auto insurance build your credit score.
None of the items listed will build your credit. Unfortunately, if you decide to stop paying your phone or cable bill, they can send you to collections which will drastically lower your credit score. Now, if you get an overdraft that is tied to your checking account that WILL build credit because it works almost the same as a credit card.
3. My credit is terrible, so I’ll just get a co-signer.
Unfortunately, most times it doesn’t work like that. This isn’t the case in EVERY situation, but with most financial institutions, they will only allow you to use a co-signer if you have no credit or if you haven’t had a lot of history. For instance, a 20 year old college student that only has a Chase credit card with a limit of $1,000. He/she has never been late on a payment and have had the card for about a year. I would guess his/her credit score would be about 740. If he/she decides to buy a new car that costs $18,000, because they only have history of a $1,000 credit card, the bank will probably ask for a co-signer.
4. I don’t have a credit card or ever had a loan so I don’t have any credit.
For most of us reading this blog, we’ve all got a mountain of student loan debt. It is actually building our credit even though it is being deferred. And by the time we graduate we’ll have had it for at least 4 years and never been late on a payment (because it’s being deferred); the credit report will most likely give a good credit score. However, if you have never had a credit card, auto loan, or school loan; on the credit report the score will come back as “N/A” and most financial institutions will equate that to the score of 680, which won’t qualify for the lowest interest rate.
Now that you know the truth about how credit reports work, you can avoid the misconceptions that can lower your credit score! As a healthcare provider and a business owner, it is imperative to plan for the future by preparing now. Time is the biggest contributing factor to having a great credit score. The earlier you can start building your credit portfolio, the better you’ll be as you graduate and look to buy into or purchase a practice.
Jeff Foster
University of the Incarnate Word Rosenberg School of Optometry
