Credit Assumptions We All Make, But Shouldn’t! Part 1

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Today’s world is full of information, both good and bad, from companies, advocates, friends, family, colleagues, academia, and anyone with an opinion. Some of this information can save you money or even make you money if you are lucky. Other information can be extremely costly, especially when it comes to your credit score and personal finances.

We have compiled a list of assumptions that we hear on a frequent basis when meeting with clients and provide an alternative way of thinking that will help you increase your credit score.


Assumption #1

If I pay late fees when I make a late payment on my credit card, the credit card company will not report a late payment to the credit bureaus.

Wouldn’t this be nice?! Unfortunately, this is not the case when it comes to late payments. Paying a fee to prevent negative information from reporting on your credit report is a bit of a misnomer. Your credit score is designed to show how responsible you are at managing debt – paying on time, keeping low levels of debt, longevity of accounts, and a good mixture of accounts – and to pay to have this removed contradicts being responsible with debt.

Thirty-five percent of your score depends on your payment history, so each time you are late on a payment your score will undoubtedly go down. This is why paying your bills on time is so vitally important to maintain your credit score and finances.


Assumption #2

If I pay my balance in full each month, my credit utilization ratio is 0%.

While this is a great habit to have, the amount due on the billing statement actually determines your credit utilization ratio. The credit card companies report this amount due to the bureaus before your due date and when you most likely paid down your balance, so this amount determines your credit utilization ratio and not the balance after you make a payment.

The only way to show a 0% utilization ratio is to pay your balance in full well before the due date so that the billing statement shows you owe $0.00. To ensure that your credit card accounts still report positively even with a balance, keep your balances below 30% of your credit limits (ex: $300 balance with a $1,000 credit limit is 30%).

If you are unfamiliar with your credit utilization ratio, or also known as the balance-to-limit ratio, you should get to know it! This ratio has a very large impact on your credit score and your risk level to lenders. The ratio consists of your reported balance or billing statement balance in relation to your credit limit. The higher the ratio, the more risk you pose.

This is also one reason not to close unused accounts (more on this later), because if you have a high utilization rate on one card, but you consistently have a zero balance on another card, they will equal each other out.


Assumption #3

I was late on my credit card a few times, but I pay all of my other bills on time, so my score should not suffer because all my bills report on my credit report. 

Nope. If you are late on your credit card payment, but pay your rent and utilities on time, your credit score still decreases. Rent, utilities, cell phone accounts, cable, internet, and other monthly services do not show up on your credit report, unless you fail to pay your bills on time and the companies send your account into collection. You should always pay your bills on time, but do not expect these on-time payments to support late payments on your credit cards or give you a boost in score when you make payments on time.


Assumption #4

Avoiding credit cards altogether will give me the best score because I can stay debt free and not worry about any of the risk that comes with credit cards.

We totally recommend living debt free, but the real world we live in does not allow us to have a great credit score without a credit card. Longevity of accounts and mixture of accounts (credit cards, installment loans, mortgages, etc.) make up a significant percentage of your credit score. The impact is even more extreme if you do not have a mortgage or car loan (installment) as well because that means you do not have any accounts to calculate a score and build a credit file.

The very purpose of a credit score is to show you can handle debt responsibly and to prove your risk to lenders is low. When you go to buy a house or a car, they want to see that you are not a risk to default on your payments. The only way to do this is to prove you have a history of responsible financial history. By avoiding credit cards, you are unable to show this responsibility and build a positive credit file.

On the other hand, you do not need to max out your new credit card and hope to pay the balance in full each month to have a great credit score. Keep your balances below 30%, show you can handle debt responsibly, track your spending, and you will see great results! It is as easy as paying for your Netflix account and a tank of gas each month on your credit card and then paying the balance on time.


Assumption #5

There is no life after a bankruptcy. You can never have a credit score greater than 700 if you file for bankruptcy.

It is true that bankruptcies impact credit scores in very negative ways, but they do not ruin your credit forever. Bankruptcies and any accounts connected to or included in the bankruptcy remain on your credit report for ten years.

The thing most people do not realize is that the negative impact of the bankruptcy decreases over time. The impact in year ten is much less negative than the impact in year 2. The impact can be much less if you are able to install good debt management habits right away. We just had a client that was able to build their score back to greater than 700 before the ten year mark, so it is possible!


Here is a breakdown of what influences and determines your credit score:

Credit Breakdown




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    Gershman Mortgage , Iowa