Is building a good credit history really that important?
Most definitely. Aside from the obvious reasons, your credit can affect many not-so-obvious areas in your life… including your employment.
If you’re in college or just getting your career off the ground, it’s absolutely imperative to debunk these myths now rather than later.
Myth #1: You don’t need to build credit if you don’t borrow money
Let’s be honest: college students and credit cards don’t always mix well. As a result, many forgo them altogether. If you go this route, you’ll be in for a rude awakening after graduation.
Why? Because even if you pay cash for your car, clothes and the kitchen sink, you still need credit for things like:
- Utilities – No credit history? Don’t be surprised if your cell phone provider requires you to pony up a deposit. The same holds true for your home’s electric, cable, gas, etc.
- Insurance Policies – Whether it’s fair or not, in the vast majority of states, insurance companies can factor your credit into the pricing. According to one study, if you maintain good credit from age 25 to 65, you will have saved $23,000 on car insurance.
- Employers – Just like insurance companies, many states allow employers to use credit history as part of their hiring and promotion decisions.
These are all good reasons to start building credit now – in a responsible way.
Myth #2: The more you use your credit cards, the better
Actually, the opposite is true. Using your credit cards too much can backfire.
The Credit Utilization Ratio (CUR) is the percentage of a limit that’s used. For example, if you have a card with a $10,000 limit and use $7,000 of it, that’s a 70 percent CUR.
Why does that number matter? Because having a high CUR can actually hurt your credit score.
FICO, the most popular type of credit score, actually favors a lower percentage. It’s usually best to keep your CUR below 30 percent on a given card. Some credit experts recommend an even lower amount, at 10 or 15 percent.
So contrary to popular belief, you might actually be better off using your credit card less rather than more.
Myth #3: Not using credit means you have good credit
Many people wrongly assume that everyone starts with “good credit,” and only mistakes mess it up.
Nothing could be further from the truth.
Having little to no credit history basically leaves you with a blank slate. It’s not “bad” in the sense of having derogatory info on your report, but it’s still bad nonetheless. Without having a history to look at, how are banks supposed to gauge your worthiness?
Start building credit now, not later. This especially holds true if you hope to buy a home in the next few years. But even you don’t plan to buy, keep in mind that most of those credit card offers you see with 5 percent cash back and good fuel rewards will require an established and robust credit history to be approved.
If you don’t have student loans or any other credit accounts, start out with an entry-level card from Capital One or your ask local bank to help you get the credit ball rolling.
Myth #4: Your demographics affect your credit
If you pass the bar or get a Ph.D. will that help your credit? Nope.
Your education, income, gender, race, location, nor any other demographic data matters when it comes to credit scoring.
The only demographic component that could maybe affect you is your age. It has no direct impact, but since the age of your accounts factors in, your age could indirectly affect your credit. After all, you can’t be 22 years old and have a mortgage that goes back 25 years!
Myth #5: Small delinquencies won’t matter much
Know that parking ticket you’re ignoring? Procrastinate for too long, and it may come back to haunt you later.
Make no mistake about it, major delinquencies will hurt more. But small ones can muddle things up, too.
Fortunately, FICO recently tweaked their formula to ignore small-dollar “nuisance” collection amounts. But that doesn’t mean you’re off scot-free when a real human analyzes your report. I’ve heard from a couple people who were denied a mortgage because of “nuisance” collections; only $10 and $50 charge-offs.