Jul 26, 2023 · Written By Jordan Atwood
In my role as a Housing Counselor, I have worked with hundreds of clients to become eligible for a home loan. One of the biggest homeownership barriers they face is a sub-par credit score. Tackling your consumer credit and making a plan for improvement can be daunting. For the novice, it’s often difficult to know how to start. It doesn’t need to be. I like to kick off the conversation dispelling the top 5 credit myths I consistently hear from my clients.
Myth 1: Pay Cash Only for Everything
Some will advocate that paying for everything in full with cash is preferable as compared to debt financing. Cash is a great way to manage your money responsibly, but it isn’t necessarily advantageous for your credit score. Not having a line of credit can cost you more in the long run by having high interest rates if you need a mortgage loan. For those who like to pay in cash, moderate use of revolving credit is a better approach. Establish at least one active line of credit that generates a monthly installment payment to create/maintain your credit score.
Myth 2: Medical Bills Don’t Matter
We have all heard the rumor that medical bills don’t matter. That is far from the truth. Once a medical bill goes unpaid, it will be sent to collections. This medical collection will hurt you just like any other unpaid debt. It will send your credit score spiraling downward.
Myth 3: Financing Medical Bills Is Best To Avoid Collections
Often a hospital bill can be thousands of dollars out of pocket depending on your insurance. If you are unable to pay this bill outright, ask to be put on a payment plan instead of using a credit card. Normally you can even choose how much your monthly payment will be so you can preserve the affordability of paying this debt. By doing this, you are getting 0% interest financing on your medical debt, and it won’t be submitted to collections.
Myth 4: After 7 Years Unpaid Debits Disappear From Credit Reports
Once a collection on your credit report is 7 years old, you can no longer be taken to court over this debt. Unless the company chooses to write off your debt, you still owe this money. This debt can still negatively impact your credit score and can be filed with the courts as a judgment. Any judgment in your name could prevent you from buying a home until it is paid. I have seen a 20 year old debt prevent a person from purchasing a home until it was paid in full.
Myth 5: Credit Karma Is Always Correct
Credit Karma is its own company and generates a distinct credit score from the three major credit bureaus lenders use (Equifax, Experian, Transunion). Often my clients have had a score up to 100 points lower than Credit Karma claimed because it did not track all their collections correctly. Credit Karma is a great tool to monitor your general credit health, but it should not be used as a legitimate source for determining your collections or credit score.
The Facts
The world of consumer credit can feel mystifying. The fact is there is no magic formula for strengthening credit. Situations vary and plans must be tailored to each individual. However, for people ready to make changes to spending habits and who are willing to put in the time to realize their homeownership dream, there are simple, tried, and tested strategies available.
Open Door Community is a HUD-certified housing counseling agency. We work with first time home buyers who can be approved for a mortgage equal to what you’re paying in rent. We also offer personalized credit counseling and can enroll clients in a Virginia Housing program to improve credit scores.
Give us a call at 276–228–6280. Let’s make home the goal!
To learn more and join Open Door Community’s housing first mission, visit www.wythehope.org.
Originally published on Feathers of Hope at medium.com