Pier 3 Condo

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.

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: Paying off (or “settling”) late payments, tax liens, collections or judgments will remove 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: 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: Credit repair is not legal.

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: 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: By law, negative items on my credit have to remain for 7 years.

This is not true. The law only states that an item can remain for as long as 7 years, if it can be proven to be true and accurately reported. Some items such as bankruptcy, can remain for as long as 10 years. There is no law that states that any item has to remain on your credit for any set period.

Myth 6: I make a lot of money so I must have excellent 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.

While never being late is an important part, it is only 35% of your credit scores. In order to have great credit, you need to focus on all the factors that make up 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: When you get married, your credit reports will be merged with your spouse.

False! This is something that many believe, but it is absolutely not true. Every individual has their own unique credit reports. You may share some credit items with your spouse if you have joint accounts.

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.