The 10 Greatest Myths about Credit
In this article, I will expose some of the most common myths about credit and credit reports. I love watching the expression on my client’s faces when they realize the truth about some of these common myths.
You will be hearing some things that will most likely be the opposite of what you currently believe. Keep in mind that credit and credit reports are not widely understood, and even those in the financial and credit industry, often do not have a good understanding. With that in mind, let’s get started
Myth 1: Settling or paying off tax liens, collections, late payments or judgments will erase them from your credit reports.
This statement is not true. In fact, when you pay off an old collection account, in most cases, your creditors will update the trade line to show as a paid collection, but with a current date. This means that this trade line is now a current paid collection, instead of an old unpaid collection. They are both still negative, but a current negative item will cost you more points than an old one. I am not saying that you should not pay your delinquent accounts, but only that you need to understand the consequences.
Myth 2: If I pay my total credit card balance every month, I will raise my credit scores.
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: Credit repair is illegal.
This is far from the truth. In fact, credit repair is legal for you to do on your own, or hire anyone you choose to do it for you. Repairing your credit is a right protected under the Fair Credit Reporting Act (FCRA).
Myth 4: Consumer Credit Counseling will improve my credit.
Credit counseling programs will only harm your credit. The first thing that will happen as a result of enrolling in a CCCS or credit counseling program, is that your creditors will add the line “Account in CCCS” or “Account paid through credit counseling” to each of their trade lines. This will not affect your score, but does look very negative to lenders. The next thing that seems to always happen is that the credit counseling program will make the payments to your creditors late. Sometimes this is not their fault since they just setup the payment to be on your original due date. However, the credit card companies often adjust your due date, and since nobody, like yourself, is monitoring this, they began making your payments late. This will result in late pays on your credit, in addition to late fees.
Myth 5: The law requires that negative items stay listed on my credit for 7 years.
Completely false! There is no such law.
Myth 6: Making a lot of money will give you good credit.
Making a lot of money really has very little to do with your credit directly. What determines your credit is your payment history, account balances, your open accounts, the type of accounts, etc.
Myth 7: I have never been late on my payments, I must have great credit.
It is important to your credit scores that you have never been late on your payments; however, this is only one piece of the credit score pie. It is possible to have never been late on a payment and have sub prime credit, or no credit at all. Your history of payments only makes up 35% of your credit scores.
Myth 8: Your credit reports from all 3 major credit bureaus will be the same.
Actually, this is quite the opposite. It is very rare to have all the same items on all your credit reports from each of the major credit bureaus. This is because not all companies report to all credit bureaus, and they don’t always report the same thing to each bureau.
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: Closing credit card accounts will increase your credit scores.
This one is a big surprise to most people. I am sure at some point you have been told by your mortgage professional to close some of your open account to better qualify for a loan. Once you closed those accounts, you watched in anguish while your scores dipped as much as 100 points or more. Why did this happen? The reason is that one of the largest factors that make up your credit scores is the age of your good-standing accounts. The longer an account has been in good standing, the better it is for your credit scores.
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.
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