Where do myths come from? Most of the time, they begin with some misinformation or a misunderstanding, and can grow into a widespread misconception.
Many myths have no basis in reality, but the most dangerous myths are rooted in “some” facts. They are harder to dispel because you need to take the time to separate fact from fiction.
The world of finance and lending are certainly full of myths. Not everyone has a strong understanding of how things work. Or people may even have outdated information, which can easily happen with the relatively quick rate of change in this sector.
Today, we’re going to address and diffuse a few of the most common myths out there surrounding online loans. These myths may be keeping countless people from getting the help they need when they’re facing a financial emergency.
Myth #1: Applying Will Hurt Your Credit
This popular myth may be rooted in the myth that all lenders run some type of credit check for a loan or a line of credit, which is true for some lenders, not all. However, there is a major difference between what is called a “hard pull” (or hard credit check) and a “soft pull” (or soft credit check).
What is a Hard Pull?
A lot of people want to avoid a hard credit check because they’ve heard that it may decrease your credit score, which is true.
However, most of the misconceptions around credit checks come from the fact that most people have lumped all types of credit checks into this category. A credit check is a credit check, is a credit check, right? Not true.
It is true that these hard checks are often done by lenders when you go to them for a loan or a line of credit application. It’s also true that a single inquiry may lower your credit score slightly. It is also true that a hard inquiry is typically recorded on your credit report. This is why you have to authorize a company to run one.
However, every single hard credit check may not be a knock against your credit score. FICO may grant you an exception if you’re rate shopping.
During the process of rate shopping, you may be able to find out what rates you might expect from different lenders without committing to any particular financial product.
With rate shopping, you have a period of time when all your applications for a single type of product, such as a mortgage for example, will show up as one hard inquiry on your credit report.
So, let’s say you’re looking for a mortgage and apply with five different lenders to see the available rates. These five credit checks will only show up as one inquiry on your report, as long as you complete these applications within the rate shopping window.
Rate shopping is a good way of comparing potential loans from different providers in order to determine which one might suit you best. You may rate shop for products like:
- A personal line of credit
- An auto loan
- An installment loan
- A mortgage
What is a Soft Credit Check?
The soft pull or soft check looks at certain elements of your credit report. You do not have to authorize a company to run one, and there may be a chance that a company has run one on you without your knowledge.
A soft credit check may also be run by a would-be employer, as a means of screening an applicant. Soft pulls may also be run by banks and credit card companies to determine whether a customer could potentially qualify for a new offer or card upgrade.
This soft check is not recorded on your credit report and will not impact your score. In fact, if you check your own credit score, this is considered a soft check. It’s generally recommended to check your credit score periodically to gain an insight into your current standing.
Myth #2: You Can’t Build Credit History Without a Credit Card
It can be more difficult to build your credit history without a credit card, but it’s definitely not impossible.
It is true that credit card companies typically report your payment activity to credit bureaus. This means if you’re keeping a low balance on your credit cards and making regular payments, these payments may be reported to credit agencies and may impact your credit score as long as you’re not missing or defaulting on any other payments and keeping up with good credit habits. Conversely, if you’re always near your credit limit or making late payments, your credit score may be negatively impacted accordingly.
What if you’re paying all of your other bills on time? Does that get reported to a credit agency? Not always. However, if an account is late and goes into collections, credit agencies may be notified. But few utilities (water, electricity or gas) or telecommunication (TV, cell or internet) companies will report your payments.
This is why a lot of people assume (incorrectly) that you can’t build your credit history without a credit card. And this can be a bitter pill to swallow if you’ve got bad credit (or no credit) and can’t get a credit card.
But there are other ways to build your credit history that may make a difference if you’re strategic and committed to the plan.
Options That May Help Build Credit History Without a Credit Card
If you are unable to build your credit history by making credit card payments, you may have to find other options through which your payment activity may be reported to a credit agency.
One thing you may want to consider if you rent your house or apartment is working with a rent reporting service. Your rent payments are not typically reported to credit agencies and many credit reports don’t contain rent information. But, for a charge, companies will report to credit agencies and let them know whether you are making your rent payments on time.
Rent may be your biggest expense, so why not be rewarded for making these payments on time every month?
Another way you may potentially build credit history is by becoming an authorized user on a family member’s credit card. As an authorized user, you may get access to the primary cardholder’s credit limit — and potentially their payment history, too.
Some credit card companies may report credit activity for authorized users. If they do, your history may be affected by how your loved one uses and pays off their card, even if you never use the card yourself.
Ideally, they’ll keep their balances low and pay their bills on time. This way, you may only gain positive payment entries on your report.
However, any activity may be shared, including negative entries. If something happens that makes it hard for them to pay their bills — or if you both run up large balances — this behavior may damage your credit.
As a result, it’s especially important to choose someone you trust to pay bills on time before you become an authorized user. Speak with your loved one about your plans to use this card responsibly.
Note: Neither of these tactics are a cure-all for damaged credit. They’re simply strategies that may help you build your credit history over time. Your credit score is a very complex and dynamic number that is based on numerous factors.
Unfortunately, it may be far easier to damage credit history than it is to repair it. Any credit building activity can be nullified if you’re doing things to hurt your credit in other areas. For example, rent reporting will not help you if you’re racking up new debt and/or missing payments elsewhere.
Myth #3: You Have to Put Up Collateral
Some people seem to think that if your lender isn’t running a credit check, they must be asking for something in lieu to protect themselves. And that something must be collateral in the form of your house or your car, right? Not necessarily.
If you’re asked to put up some sort of asset as collateral, you’re likely taking out what is called a secured loan or line of credit. However, if you’re not asked to put up collateral, it’s generally an unsecured loan or line of credit.
Both these types of loans are certainly offered online as well as in person. But just because the lending company isn’t performing a hard credit check, doesn’t mean that they need you to put up collateral in case you default on your loan.
Myth #4: All Online Loans are the Same
Through reading the other points, you have already seen how this simply is not true.
Where did this myth come from? It’s hard to say exactly.
The reality is that not all online loans or online lines of credit are the same. There is variance among them, and if you consider applying for one, make sure to do your research so you can make the right decision for your financial situation.
Posted in: Online Loans