Credit Myths Exposed: What Really Affects Your Score

Today, we're diving into that three-digit number that can make or break your financial life and the myths swirling around it. What do people still get wrong? And what can you do to take control? Let's find out. Welcome back to Dvorkin on Debt, where we have chief geek Howard D'vorin with us.

That's me, right?

Yep, that's you. So, this week I want to talk about that three-digit number that can make or break your financial life, the myths that swirl around it and what people still get wrong. So let's start with a mythbuster.

Does checking your credit score hurt?

No, it doesn't. However, if you check your credit score, it does not hurt.

However, that's called a soft pull. If you go and apply for a credit card or some form of credit, that hurts and brings down your score by four points every time you do it.

But if you pull it yourself, then if you pull it yourself, you're absolutely fine. Yeah.

What are some surprising or misunderstood things that can impact your credit score?

Well, people think about a lot of things. How to improve their score? Closing accounts that they don't use. 

Sometimes that's a good thing, but a lot of the time, these are aged accounts and it shows your credit history. And what they do leave is utilize they leave the with accounts that are fully utilized or have heavy usage on their credit lines and maybe their credit line is $1,000 and their balance is $800 and that's an 80% credit card or credit line usage and that's a bad thing. The bureaus look very bad upon somebody like that. So, it's not always great to turn off unused uh cards. However, I recommend that you try to do that over time and certainly maintain your credit score without tanking it overnight.

Yeah. So, people that want to rebuild their credit quickly, what are some realistic terms of how fast you can see that improvement?

Listen, there's lots of ads out there that says that they're going to fix it overnight. It's not real.

It takes time. You got to build it. If you have poor credit, go through and maybe get a secured card that turns into an unsecured card. Do the things that are necessary to build your credit over time. Pay off balances. A lot of people come to me and say, "Howard, I paid off this charged off account. Why isn't my credit score improving?" Well, because the damage is already done. You have to take it slow and you have to understand all the nuances of the credit. Uh it's a very complicated algorithm to work with and unless you're an expert, just take it slow. The reality is if you want good credit, pay your bills on time and don't overuse your credit. And if you have to overuse it, make sure you make every effort to pay it off.

So, I hear you have a 90-day challenge for our listeners. What should they focus on if they want to raise their credit score within that time limit?

There's all sorts of myths and things out there. People need to go through and utilize their credit, but don't max out their cards. If you're carrying a balance, make sure it's no more than 30% of the balance allowed. Meaning, if your credit limit is $1,000, the balance you cover is 30% $300.

Try to get it down to 10%. Know your limits and try to work underneath them. That's going to help people. A secured card is a great way to start to challenge and build your credit back. And a lot of the times uh there is an option after a couple months or a year or so those secured cards turn into unsecured cards where you can use it like a regular credit card. The balances are not significantly high just to give you the chance to rebuild your credit and not get yourself in trouble. 

The third thing I would suggest is go through sign up for autopay on accounts that are due. That way you don't miss a payment and you don't get yourself in trouble. Um autopay is a great thing for people that are living a busy lifestyle.

Um and it will not as long as it works and there's money in the bank it will not get you into trouble.

I know for me autosave has been such a big help, such a savior. Not that I'm the busiest person on the planet. You ask me, I'm pretty busy. You ask someone else, I'm busy doing nothing. But the autopay does help for someone who's not always focused.

So, you should turn around and also look at your debt to income ratio. Meaning, how much you make every month and how much you spend and how much debt you have. If you're taking home 5,000 a month and you have a $1,000 a month debt service payment, credit card bills of $1,000 a month, that's a 20% debt to income ratio.

And that is probably pretty good.

So, let's hit a lightning round of credit score confessions. Rapid fire myths people still believe. You ready?

I am ready. You sure? I think I'm ready. Wait a minute. Yeah, I'm ready.

Okay. Okay. Does closing a paid off card help my score?

Sometimes, but not really. The reason why I say sometimes, you want to have older credit lines that you show responsibility, but also you have to watch. If you close a paid off card then and all you have are non-paid off cards, that can hurt you. Can I stay debt free without budgeting or checking my credit score?

Checking your credit score does not help you get debt free. However, it tells you where you are and it reminds you, hey, you've got a lot of debt out there.

Budgeting is going to help you get debt free. That's extremely important. Budgeting is the key. Key.

If I pay off collections, my credit is instantly fixed. Right. Wrong. 

Wrong. Now, listen, that's an interesting thing. A lot of people call me over the time and say, "Howard, I paid off this account. I didn't pay him for five years, but I paid it off and my credit still is in bad shape." Well, guess what? Unless you pay that account off with the agreement in writing from the underlying creditor that they will not report bad things about you on your credit. It's staying on there and it's not going to help you. it helps you a little more, but an R9, which is the category of reporting on your credit uh report, uh is going to stay there. It'll say paid R9 still stinks.

Okay, so last one. Rent and utilities don't count toward my credit score, or do they? Sometimes.

Oh, and what I mean by that, there's something called Experian Boost. They report rent. Um, there's other forms of uh companies or services that will report uh to the credit bureaus your on-time rental payments. It's a way to enhance somebody's credit, showing responsibility. And why people do that is to show responsibility that they paid every month so then when they go to buy a house, they have something to report that's possible.

Okay. Awesome. So, your credit score isn't just about what you owe. It's about how you manage your financial reputation.

Any financial advice for people who want to take control of those three digits?

A credit score is a tool. It's not a label. It doesn't show the real person.

You know, understand that you can go from bad to good with a credit score. It takes some time, but it is good that you will work through the challenges uh that you've had in the past, but certainly you can do things to fix it, but it also must be protected.

Okay?

And keep in mind that your credit score isn't a life sentence, it's a snapshot.

Join our 90-day credit score challenge and let's boost those numbers together.

Thanks for joining us on Dvorkin on Debt. And if you're overwhelmed by your own money challenges, visit debt.com.