Credit Myths Exposed!
This is one of my most favorite articles that I have written because it addresses so many questions that people have about credit. I love watching the eyes of my clients widen when they find out the truth about some of these most common myths.
A word of warning before we get started You are about to hear some things that will most likely be the exact opposite of what you have been told. Keep in mind that credit issues are some of the most misunderstood of all financial topics, and there are many professionals in the financial industry giving advice to their clients, who do not really understand credit themselves. On that note, here are the greatest myths about credit
Myth 1: Settling or paying off tax liens, collections, late payments or judgments will erase them from your credit reports.
This is simply not true. In fact, by paying off an old collection account, you can actually lower your credit scores. The reason for this is because more recent negative items will hurt your score more than older negative items. If you pay off an old collection account, not only will the collection account remain on your reports as a paid collection, but it will now show a current date, and cost your more points. I am not suggesting that you should not pay off your delinquent accounts, only that you need to understand the consequences so that you can factor that into your decision.
Myth 2: Paying my credit card balances in full every month will improve my credit.
Keep in mind that the credit system is designed by the creditors, to help them determine if you are a good credit risk, and if you are an optimal credit user (one who uses the system in such a way that it will generate revenue for the creditors). By paying off your accounts every month, you are not establishing a history of optimal credit usage. What your creditors want to see, is someone who pays slightly more than their minimum monthly payment every month, on time, with only occasional balance pay-downs. This behavior will optimize your credit scores.
Myth 3: Repairing credit is illegal.
Very false! Credit repair is not only perfectly legal; it is actually protected by federal law. For more information on the law, you can refer to the Fair Credit Reporting Act (FCRA). It is legal for you to repair your own credit, as well as hire anyone you choose to do it on your behalf.
Myth 4: Credit Counseling (CCCS) programs will raise my credit scores.
Credit counseling programs do not help you increase your credit scores. In fact, they will usually harm your credit in a couple of ways. First of all, when you enroll into a credit counseling program, your creditors will insert a line on your credit reports for each account included in the program that states you are in credit counseling. This looks very bad to lenders that you may be applying for loans with. Also, in most cases, credit counseling programs will make your payments to your creditors late. This will result in additional late pays on your credit reports.
Myth 5: Negative items have to stay on my credit for 7 years because that is the law.
Completely false! There is no such law.
Myth 6: Making a lot of money will give you good credit.
Actually, your credit scores are made up of several factors such as payment history, account balances, types of credit in use, etc. Your income is not one of those factors that determine your credit scores.
Myth 7: As long as I have never been late on a payment, I will have great credit.
Your timeliness of payments does make up 35% of your credit scores, but the other 65% is made up of other factors that are not related to making your payments on time. It is important to understand all those factors to maximize your scores.
Myth 8: Your credit report from each credit bureau will be the same.
This is not true. In fact, most of the time, all 3 of your credit reports will differ from one another. The reason for this is that each of the credit bureaus is a separate independent company, and the processes at each are different. Also, some creditors may only report to 1 or 2 bureaus, but not all 3. In my experience, your reports will very rarely be exactly the same.
Myth 9: If you are married, you will share the same credit reports as your spouse.
This is not true at all. Even if you are married, you will still have your own unique credit reports. It is possible to see some shared items if you have joint accounts, but your credit reports are yours.
Myth 10: If I close my old credit accounts, my scores will increase.
This is often a huge surprise for many. When you close old accounts, your scores will often drop substantially, sometimes by more than 100 points. Often a lender will ask you to close some old accounts to qualify for a loan, but once the accounts are closed, your scores may actually prohibit you from qualifying. This is good knowledge for to know so you understand the impact of this decision. Old good standing accounts carry more positive weight on your credit scores than newer accounts. When you open new credit, you may also see a temporary drop in scores until those accounts have seasoned (usually 6-12 months).
Armed with this new knowledge, you can now get started putting it into action to improve your credit, as well as share it with others.
Tags: business, consumer credit, Credit counseling, credit debt, credit repair, debt, debt consolidation, Finance, Personal Finance
This entry was posted on Friday, May 15th, 2009 at 7:56 am and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.