Let’s face it; credit scores dominate a large part of our personal financial lives and how credit scores are calculated can seem complex and convoluted. This leads to a lot of misinformation out there, so it pays to understand how they work so you can make informed decisions about your finances. Here are eight of the most common credit myths to watch out for!
Myth 1: If I Pay Off a Collection, My Score Will Improve
Unfortunately once a collection item is on your report, the damage is done. FICO has publically admitted that paying for your collection items does not improve your score. While a collection will hurt you less as it gets older, it will remain on your credit report for 7 years. However, that doesn’t mean there isn’t a benefit to paying off your debt. Doing so will reduce the total amount of debt you own and as a result will be better in the eyes of a lender than an unpaid account.
Myth 2: Paying Off a Collection Resets the Debt Clock
This is a commonly held belief…even in the credit repair field!! The claim is that when a collection is updated from “unpaid” to “paid” that the collection can appear to the scoring formula as having originated more recently than it did. According to Equifax “Paying off a debt in collections does not impact the time it remains on your credit report. Paid or unpaid, the collection will remain on the report for seven years and 180 days.” An opinion letter from the FTC also serves to clarify #2 in the line up of credit score myths.
Myth 3: Having and Using Credit Cards is Bad
While accumulating more debt than you can handle isn’t prudent, using your credit card(s) wisely can offer one of the easiest ways to help establish and build credit history. (Prepaid credit card and debit cards do not help build credit). After payment history, utilization is the most important part of your credit score – accounting for 30% of your overall score. Utilization is your statement balance as a percent of your total available limit. Your goal is to keep your utilization below 30%. When it starts to creep over that 30% it can indicate that a person is overextended and more likely to miss a payment.
Myth 4: Too Many Inquiries Hurt My Credit Score
While this may hold true if you’re applying for multiple credit cards in a short period of time, if you’re shopping around for a car, mortgage or student loan, these are treated in differently. Credit agencies recognize a “shopping mindset” when they see one. If a group of inquires for these types of loans is made over a 30-day period, FICO Scores will count it as one inquiry. In addition, FICO also looks at your credit report for inquires older than 30 days, and depending on the model used, will consider those that fall into a typical shopping period as part of the same inquiry.
Myth 5: You Should Close Credit Accounts You Don’t Use
Open accounts spell available, potential debt so it’s better to close them, or so goes this credit score myth… The reality is that it can hurt your credit score because you’re reducing you’re overall available credit. Unless you’re increasing other credit card limits or scaling back your spending, this will negatively affect your utilization rate.
Myth 6: Bad News Comes Off in Seven Years
While negative information such as late payments, collections and Chapter 13 bankruptcy (reorganization of debt) comes off after seven years, a Chapter 7 bankruptcy (exoneration of all debt) has a window of 10 years.
Myth 7: Checking My Own Credit Will Harm My Score
Reporting agencies distinguish between hard credit pulls & soft pulls. When you apply for a credit card, the agencies chalk that up as a hard pull and it can count against your score. According to myFICO, “one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For others, one additional inquiry would take less than 5 points off their FICO score.”
Personal requests fall under soft pulls which do not reflect negatively on your score. An annual review of your credit reports is a good idea…it helps you to ensure that the information on all of your credit reports is correct and up to date and catch signs of identity theft early. Note: While you’re legally entitled to credit reports from the three major bureaus once a year through Annualcreditreport.com, this service does not actually provide you a credit score. Rather, a credit score (often, but not always, based on credit reports) is a figure lenders use to quickly assess a consumer’s creditworthiness.
A warning from the FTC
“Only one website is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com. Other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached. For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don’t cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card.”
Myth 8: A Payment Must Be 30 Days Late to be Reported
The last of these credit score myths is that payments must be 30 days late before they affect a FICO score. While generally late payments on revolving accounts such as credit cards are not reported until they are 30 days late, creditors can report a payment that is even 1 day late. Late payments on installment loans such as cars are often reported sooner than the general 30 days. Keep in mind, even if it’s not reported, creditors do apply late frees and interest fees for late payments.
Avoid These Credit Score Myths – Check Your Score
Contact us today for a free credit analysis. For those in need of credit repair, we’ll be happy to recommend competent credit repair specialists.