10 Credit Myths That Can Affect Your Score

10 Credit Myths That Can Damage Your Credit Score

For most people, managing your credit can be a confusing process. Everywhere you look, in your mailbox and on the internet, there are systems, programs and websites offering ways to improve your credit score, fix damaged credit,  offering “deals” to consolidate debt. Some offer “free credit analysis” which can actually lead to a lower credit score!

Much of what is out there is simply dangerous mis-information that outright contradicts the correct steps you should take to improve and maintain your credit scores.

The best defense against making a credit blunder is to better educate yourself about credit and ways to manage it. Everyone should understand the significance of maintaining pristine credit. A great credit score can afford you the very lowest interest rate on a home loan. A marginal score may result in a home loan at a much higher rate of interest and larger down payment requirement. A poor score may put a home loan out of reach altogether. To follow are some of the main factors that make up your score, ways to navigate the system, and how to get and keep good credit, as well as 10 common credit myths. Once you learn the truth behind these myths, you’ll be in a more knowledgeable position to distinguish between positive credit options and the negative credit options that can destroy your credit scores.

Myth #1: You Should Avoid Using Credit Cards
Many published articles have actually advocated that consumers stop using their credit cards, pay off everything, and go to an all-cash basis. While that a great way to stay out of debt, it’s destructive to your credit score. That’s because Fair Isaac (the creator of the current credit scoring system referred to simply as FICO), says that there are 5 factors that make up your credit score, one of which is how you use and manage your credit card debt – a factor that makes up 30% of your score. That could equate to as much as 255 points! (The maximum score is 850)

In order to prove to the scoring system that you know how to manage revolving debt, you MUST have active credit card accounts. Use your cards every month, for groceries, gas, etc. and pay them off every month. If you do not have a credit card and your scores are under 650, you could apply for an on-line secured credit card at banks such as: http://www.orchardbank.com or http://www.firstpremierbankcards.com. If your scores are high enough (ask your bank what the score requirements are), you may want to consider going to your bank to apply for a card. Exception: Do not apply for credit of any type when you are about to enter into or have already entered into a loan transaction. New credit will temporarily bring down your score.

Myth #2: Consolidating Debt Into One, Low-Interest Credit Card Will Increase Your Scores
Everyone gets the offers, “Dig yourself out of your financial hole with a balance transfer. ” They tempt you with big pre-printed checks with suggestions that you “Take a vacation, improve your home or just consolidate your debt.” Sounds great, doesn’t it? And it would be great except for the fact that if you consolidate all of your debt onto one credit card, you will max out that card and your credit score will drop 80-100 points overnight! Oops, they forgot to tell you that, right? Per Fair Isaac, if you have a maxed-out balance reported on your credit card statement, you can lose 75+ points instantly, regardless of how good your credit history is. Do not consolidate your credit card debt onto one low interest card UNLESS, if after transferring the debt, the balance on the credit card you are transferring to is under 30% of the available limit.

Myth #3: It’s Okay If You Go Over Your Credit Card Limit Because The Credit Card Company Authorized the Purchase
Nothing is further from the truth. Don’t go over your credit card limits, even if it’s just by one dollar. Doing so deals you a double penalty and you could lose 80-120 points from your scores. Why? Going over your limit makes it appear that you are overextended. Something to note: even if you call your credit card company and they approve an additional $200 over the telephone, you still get penalized.

Myth #4: Closing Credit Card Accounts Will Help Your Score
Don’t close credit accounts at all, with the exception of closing a joint account after a divorce. You will lose points in two factors when you close a credit account, both in the Amounts Owed factor which is worth 30% of your credit score, and in the Length of Credit History factor which is worth 15% of your credit score. (These 2 factors combine to make up nearly half of your entire credit score.) The more available money you have that you are not using, the better your score, and once you close the account, you lose the available limit on that card. Also, a common misconception by consumers is they believe when you close a credit account, any bad history on that account goes away. This is not the case. That history stays with you.

Myth #5: Becoming an Authorized User on Someone’s Credit Card Makes You Legally Responsible for the Account
It is true that any activity on these accounts, good or bad will show up on your credit report if you are an authorized user, but unless you are a JOINT owner or Co-Signer of the account, you are NOT legally responsible for terms of the agreement with the creditor, and you can have your name removed from the account at anytime. Keep in mind that any negative history reported during the time your name was on the account will remain, but no further negative history will be reported.

Myth #6: The Type of Credit Doesn’t Matter
The credit scoring system does not like third-party finance cards (e.g., department store cards, furniture store cards, etc.) Always try to stick with major credit cards (e.g., Visa®, MasterCard®, etc.)

Myth #7: Your Divorce Decree Protects Your Credit Score
Even if your divorce decree stipulates that your ex-spouse is financially responsible for debt that is held in both of your names, you remain financially liable for that debt until it is paid in full. Both of you entered into a binding contract with the creditor. If your ex-spouse is named as the responsible party for a jointly held debt, and you cannot afford to pay off the account and close it immediately, then you should monitor the account closely to make sure it is being paid on time. Otherwise, negative payment history information will appear on your credit report, and could drop your score by up to 75+ points in a nanosecond. Keep in mind that it is against the law for a creditor to remove a late pay without documented proof that it was their error. One late pay can affect your score for many years.

Myth #8: Marrying Someone Who Has Poor Credit Will Hurt Your Credit Score
Although getting married generally means that you’ll be combining finances, your credit reports won’t be combined. If you open a joint account, the credit information will show up on both reports, but your (or your spouse’s) past negative credit history won’t be reflected on the other person’s credit report unless you add your spouse as an authorized user to an account that has a negative history.

Myth #9: Making Arrangements to Pay a Charged-Off Credit Card Account Will Help Improve Your Score
If you have an old charged off credit card debt and you make payment on it, or make a written or oral promise to pay it, you will renew the 7 year credit reporting statute from that date. The best path to take in this instance is to debt negotiate. Offer the creditor .10 – .30 cents on the dollar as payment in full in exchange for a deletion letter from the creditor.

Myth #10: Those Pre-Approved Credit Card Offers Do Not Hurt Your Score
Just because credit is offered to you, does not mean that you should accept it. When you receive one of those pre-approved credit card letters in the mail, your credit report has not been pulled yet, so you are NOT approved for the account. Once you pick up the phone to call the creditor, they will pull your report and you will be penalized immediately for the hard inquiry (10% of your score.) It is best to avoid these types of special offer credit cards (including department store offers of “Open an account today to save 15% off of your purchase.” As stated above, FICO frowns upon 3rd party finance cards.

A few other items to consider:
Late mortgage payments are far more severe that late credit card payments.
Even one $5 charge-off by a cell phone company can make a difference in the mortage loan rate that you may otherwise qualify for, costing you thousands of dollars over the life of a loan.

In closing, the bottom line is to use good common sense and pay your bills on time. Damaged credit can sometimes take years to correct.

And always remember, while deemed reliable, this information is not to be construed as legal advice!! 🙂