Myths, legends and misinformation, Oh My!
On occassion, a medical student will ask me about credit and in some cases how to attain it. This time of year is especially important for the fourth year medical students who will be looking at buying homes in April, May and June as part of the residency relocation process.
Credit has its fair share of myths, legends and misinformation. Pile on top the proprietary nature of credit scores, the formulas for which are closely guarded secrets, and navigating the credit waters becomes even more confusing. So, I want to focus on dispelling some common myths about credit reports, credit scores and credit cards. Certainly, let’s take some scare out of the lion.
10. Pulling your credit report will NOT hurt your credit score. When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will NOT affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score. (Learn more about credit inquiries.)
9. Your income is NOT factored into your credit score. Your salary, as a resident, has nothing to do with your credit report and credit score. You could be making a solid living as a resident, but that doesn’t necessarily mean you have good credit.
8. Closing a credit card account will NOT help your credit score. When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (total of all balances) compared to how much credit is available to you (total of all credit limits). When you close an account, you’re lowering the amount of credit that’s available to you, which may increase your credit utilization percentage. Higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk. This is why we warn medical students to not have any more than one credit card. You minimize opportunities for fraud when you have only one credit card.
7. There’s NOT only one credit score that all creditors and lenders use to determine your credit-worthiness. The truth is there are a lot of credit scores out there. And on top of the different credit scores that are available, there are different credit reports on which a credit score can be based. You have all seen the commercial that shows the three credit scores from the three major credit bureaus and one is not so good. This is a reminder that not all credit scores are made the same.
6. If you pay all your bills on time, there IS a need to check your credit report. It’s important to check your credit report regularly no matter what your situation to make sure the information on your credit report is accurate. Mistakes are made, inaccurate information is reported and if you’re not on top of it, your credit score may suffer. One of the most common issues I see among medical students is identity fraud. This can have a major impact on a student’s credit if not dealt with early on.
5. Paying off a past-due account will NOT remove that item from your credit report. Negative information – like late payments and collections – can stay on your credit report for up to seven years from the date of the initial missed payment. Some bankruptcies can stay on your credit report for up to 10 years from the date the bankruptcy was filed.
When you pay off an account that was previously past due, your credit report will be updated to reflect that you’re current on the account. And as time goes on, the negative information will have less of an effect on your credit score. However, as the purpose of a credit report is to keep a tally of your credit history and how reliably you’ve managed your credit, that information will stay put for seven years in most cases.
4. Your checking, savings and investment accounts DO NOT impact your credit score. Checking, savings and investments do not show up on your credit report unless perhaps you are delinquent with a payment or past due on monies owed.
3. Paying cash for everything and not having any credit card debt will NOT ensure a good credit score. Never using credit can actually hurt your credit score. Creditors and lenders often consider people with no debt and no credit cards a higher risk than those who have credit cards and have proven that they’re able to manage their debt responsibly. I know there are different views out there on this, but recently having two medical students denied a credit card because they did not have any established credit, there is some merit to this point.
2. Small debts like library fines, unpaid parking tickets and utility bills CAN affect your credit score. It’s not uncommon for libraries to turn over even small unpaid debts to collections agencies, which can wind up on your credit report and significantly impact your credit score. And more and more, utility companies are regularly reporting to credit bureaus.
1. Debit cards and pre-paid credit cards can NOT help you build credit. Because debits cards and pre-paid credit cards are essentially electronic checks and not an extension of credit, they don’t show up on your credit report. If you’re looking to build credit, using a secured or unsecured credit card responsibly is the best way to go. Borrowing through student loans is one responsible way of establishing credit, but with all federal student loans being processed through the federal government instead of lenders the establishment of credit is not as noticeable. Fourth year students are in a fairly good position to be positively looked at for home mortgages.
Credit can be a helpful tool, but being over the rainbow is not so good.