Credit Score Myths
Myth 1: Closing Credit Accounts Will Help Your Score
Lenders will sometimes tell you that it seems suspicious when they find that people have lots of unused credit available to them. If you’ve been a responsible person with your credit, it it usually a good inidcator that you will continue to do so. This is part of your credit score, responsible use of credit over time. It also could punish a person if they are applying for credit they don’t need. Sometimes when a person has a high credit score, they find out their score isn’t higher because they just have too many open accounts. They will then assume that closing these accounts will help their score. An important thing to remember is that once you’ve opened the account, the damage is already done…it can’t be undone by closing it. Closing some of the accounts could hurt your score in two ways; 1) It will make your credit history appear younger than it is, 2) It reduces the total available credit to you and altering your debt utilization ratio. If your score is in the mid 700s or above, you should be ok closing a couple accounts as long as they aren’t your oldest.
Myth 2: You Can Boost Your Score By Asking Your Credit Card Company to Lower Your Limits
Some people think that reducing your available credit somehow helps your score by making you seem less risky, however, this is untrue. Reducing the gap between your credit used and the credit limits reduces your score. The best way to increase the gap is to just pay down your debt.
Myth 3: You Can Hurt Your Score By Checking Your Own Credit Report
It is important to check your credit report on a regular basis to make sure the information is correct. You should at least check it once a year. If you are planning on applying for any new credit, you should pull your report from all three bureaus a few months prior to it to give yourself time to correct any errors you may find. FICO ignores any inquiries generated by you because it understands the need for you to review your own data. Just be sure to order from a credit bureau or service affiliated with them.
Myth 4: You Can Hurt Your Score By Shopping Around for the Best Rates
The people that write the scoring formulas know that smart consumers want to shop around for the best rates, especially on major purchases. FICO will take all the mortgage and auto-related inquires made within 14 days and counts it as one inquiry. Also, any inquiries made in the 30 days before the score is created are ignored. So if you’re shopping around for a mortgage or auto loan, you should be fine as long as you do it within the given time period.
What you don’t want to do is drag the process out or open any credit cards prior to applying for a mortgage or auto loan. Protect yourself by doing your research before you contact any lenders. Also be sure not to give out any credit or other financial information until you’re ready to buy a car. Sometimes people have reported that they are finding dozens of inquiries on their report after casually visiting a dealership or two. Even though the inquiries might be on the same day and it shouldn’t affect your score much due to the 14 days previously mentioned, having a page full of inquiries might make lenders uneasy. If you have a poor credit score and are repeadly trying for loans and being turned down, this could bring your score down further.
Myth 5: You Don’t Have to Use Credit to Get a Good Credit Score
There are people who are so afraid of credit that they swear off using it and living by a cash-only rule. They will admit that most people will need to get a mortgage or auto loan, but think that it is impressive that they have lived credit-free. The credit scoring formula takes a look at how you use credit over time, and if you haven’t used credit, there won’t be enough information. You don’t need to live in debt to build up a good credit score. Years ago this might have worked, but not in todays world.
Myth 6: You Have to Pay Interest to Have a Good Credit Score
You do not need to carry a balance on your credit cards and pay interest in order to have a good credit score. Smart credit users don’t carry credit card balances for any reason, especially to improve their score. Although you do need to have both revolving accounts like credit cards, and installment loans like mortgages or car loans, in order to get one of the highest scores possible. You don’t need to have the highest score possible to get good credit though. A score over 720 is going to get you the best rates and terms available.
Myth 7: Adding a 100-Word Statement to Your File Can Help Your Score If You Have an Unresolved Dispute with a Lender
Sometimes people will give up on disputing a bill and just not pay it, which is then reported on their credit reports. Although Federal law does give you the right to have a statment explaining the situation attached to your credit file, credit formulas can’t read these. It calculates scores based on how items on your report are coded, and the statements aren’t coded at all. Sometimes if you are disputing a bill with a vendor, it may be in your better interest to just pay the bill and then sue the vendor in small claims court.
Myth 8: Your Closed Accounts Should Read “Closed By Consumer” Or They Will Hurt Your Score
Some consumers assume that if a lender sees that a credit account was closed by anyone other than you, they will assume your were irresponsible and the creditor had to close it on you. You should know that most lenders won’t look at your full report, they are usually just looking at your credit score, which doesn’t show who closed an account. Credit bureaus figure that if an account was closed by a lender, it was due to inactivity or because the consumer defaulted. If it was due to defaulting, it would be documented in the report.
Myth 9: Credit Counseling Is Worse Than Bankruptcy
A bankruptcy is about the single worst thing you can do to your credit score. The FICO formula ignores any references to credit counseling that might show up on your credit report. It is considered neutral, neither helping or hurting your score. Credit counselors specialize in negotiating lower interest rates and working out payment plans for debtors so that they can avoid bankruptcy. They might be able to consolidate a consumer’s bills into one monthly payment, but they do not loans or do settlements. Be careful that some lenders may report you as late just for enrolling in a debt management plan. They figure that since you’re not paying them what you originally owed, you should be docked for it. Sometimes mortgages lenders will see that you are enrolled in a credit counseling program and view it as a bankruptcy. Usually these negative marks are dropped once the payment plan is completed. You shouldn’t sign up for credit counseling just for a lower interest rate or to consolidate your payments.
Myth 10: Bankruptcy Hurts Your Score So Much That It’s Impossible to Get Credit
It is true that a bankruptcy will deal a devastating blow to your credit score, but you will still be able to get credit afterwards. You could get a mortgage in as little as six months after a bankruptcy. You could also still get credit card offers. Your behavior after you file for bankruptcy will determine how fast you can re-establish credit and how much you’ll pay for it. Make sure you start off by paying all your bills on time and not running up big balances. This will help your score recover. Some lenders may not want to extend credit to you anywhere from the first few years up to as long as the bankruptcy remains on your file. Other lenders specialize in “subprime” borrowing, extending credit to people with less-than-perfect credit. The downside to this is that you will be paying a lot more in rates and fees.