Simple Myths Regarding Credit Scores

Myths and urban legends abound on the Internet, but most of them can’t impact your finances.  However, there are many financial myths that can cost you a lot of money.  Myths about credit reporting and your credit score can take a significant amount of your hard-earned money out of your wallet.

Making a lot of money will help your credit report and your credit scores.

It is a common misconception that a big salary will lead to spotless credit, low interest rates and a high credit score when, in fact, your salary has no impact on your credit report or credit score.  People with impressive salaries still get hammered with high interest rates and get slapped with decline letters when they let their credit card payments lapse, take on too much debt or engage in other behavior that impacts their credit report.

Your paycheck may not help you get the credit you want, but it is important to lenders.  Before lenders loan you money, they want to know that you can make payments well into the future.  The ability to make payments many years in advance is called “capacity.”

Your salary is used by lenders to determine your capacity to make regular payments.  Lenders use credit reports and credit scores to decide whether to issue you credit.  You can have a large salary, but if you have poor credit, it won’t matter to lenders.  Money matters, but it’s not all that’s important to obtain a good credit history and credit score.

Paying cash for everything will help your credit rating.

Paying cash for everything fails to establish any type of credit history.  Without any credit history, you won’t have a report or a credit score for lenders to evaluate.  In order to be deemed credit-worthy, you must open and use a variety of credit accounts.  A lack of credit history will result in low credit scores. Good luck getting a loan with low credit scores!

Even if you think that you will never need credit, you will need it!  Whether you need a car or a home, your credit report is your golden ticket.  Your credit report is checked before you make a major purchase and in some places, before your rent anything from an apartment to a movie.  Without some form of credit it is difficult to make online purchases or even to make hotel reservations for hotels and rental cars.

Using credit is an important part of society.  Living a cash-only lifestyle isn’t a good thing.  Managing your credit, credit profile and credit scores is a good thing.

A great credit score is a result of a credit report WITHOUT any late payments.

Did you know that only 30% of your credit score comes from paying all of your bills on time?  You won’t have a great credit score without on-time bill payment, but paying your bills on time is only part of having a great credit report.

The rest of your credit score is made up of things besides our bill payment history.  Most people don’t know this.  It would come as a surprise to many people who struggle to make monthly minimum payments.

If you want to maintain an excellence credit score, you must not allow yourself to become mired in debt.  Paying just the minimum amount each month sends a signal to the credit world that you are barely keeping your head above financial water.  Making more than the minimum payments will help improve your credit score.

A divorce decree will absolve you of your credit responsibilities.

Focusing on your joint debts while going through a divorce is one of the most important things you can do.  While judges will often decree that one spouse will take responsibility for paying the car note and the other spouse is responsible for the mortgage and credit card bills, the lenders will still honor the terms of joint contracts since the divorce decree does not invalidate or alter the original loan or credit card contract. 

Simply stated, if your name is on the contract along with your spouse, the creditors will report any late payment on both credit reports.  If your spouse defaults on the loan, you can be held accountable by collection agencies, despite any judge’s ruling and your credit report and credit score will reflect any delinquent payments.

All three of your credit reports and credit scores will be the same.

Nothing can be further from the truth.  Your credit reports from the big three agencies will be different, and so will your credit scores.

There are three main reasons for this:

Not all lenders report to all three credit-reporting agencies.  Reporting is a voluntary act and most lenders don’t report to all credit agencies.

An inquiry record is left whenever someone checks your report.  You will likely have a different number of inquiries on each report since most lenders only pull a single report.  The only exception to this is mortgage lenders, which pull all three reports.

Lenders may update their accounts on your reports at different times of the month depending on the credit reporting agency.  A lender may report to one agency on the first Monday of the month and the next agency on the third Tuesday.

These reasons make it highly unlikely that your credit score will be identical across all three credit reporting agencies.

If you have poor credit then your credit scores will suffer for seven years.

This common myth is just not true.  If you have credit problems, the design of the credit reporting system allows you to start improving your credit score in a matter of months in some cases.

The credit score system calculates your scores daily based on the information in your credit report that day.  If you work to immediately improve your credit score by making on-time payments and consolidating debt, your credit score will improve immediately.

If you are about to pay off a large debt or if you have a negative report removed, you will see an instant improvement in your credit score without waiting for seven years.

Check cards can help your credit reports and scores.

Check cards do not help your credit score any more than a checking account can.  Check cards just provide paperless access to the cash in your checking account, even though they may be branded with a Visa or Mastercard logo.  These logos make it easy to use your debit card where credit is accepted, but they are not credit cards.  They can harm your credit, however.

If you don’t carefully record any check card transactions, including any associated fees, it could result in bounced checks and declined transactions.  A pattern of bounced checks an poorly managed checking accounts is tracked by companies that may report to credit agencies.  Don’t let check cards harm your credit!

Moving your credit card balances around will help you hide your debt from the credit scoring models.

Your credit score is calculated using something called “total revolving debt,” the total amount you owe on your credit cards.  Moving your balance from one card to another does nothing to lower or hide your credit card debt from the credit scoring model.  If you have 3 cards with $1000 worth of debt or 2 cards with $1500 worth of debt, you still have $3000 worth of revolving credit card debt. It is impossible to hide your credit card debt.

Even if you consolidate all of your debt onto one card, you still have $3000 worth of revolving debt. The only way to remove credit card debt from your credit report is to pay it off! 

You can improve your credit score by transferring balances that are near their credit card limit to more than one credit card so that the amount of credit card debt available per card is higher. 

Paying off (or “settling”) late payments, tax liens, collections or judgments will remove them from your credit reports.

Paying off your bills and negative accounts is the right thing to do, but it’s not that easy to remove them from your credit report.  You can’t make negative reports disappear just by settling your debts.

Many people think that paying off debts somehow cancels out the negative report, but all reports, eve negative accounts that have been paid off, will remain on our credit report for up to seven years.  The accounts will be marked to show that the debt has been paid or release, which is better than unpaid debts, but they will still adversely affect your credit score.

Collection agencies take advantage of this myth by promising to remove the item from your credit report if you will pay your account.  Don’t fall for this lie.  It’s just not true.  The only way to remove negative information from your credit report is for the information to be inaccurate.

Credit reporting agencies will never remove an accurate negative account just because the account has been paid in full.

In addition, when a payment is made on an old delinquent account, the date is updated in your credit history and can sometimes negatively impact your credit score.  You have to be very careful to review all delinquent debts and evaluate which ones to pay, which ones may be removed due to the statue of limitations and which ones can be settled to your advantage.

Closing credit cards will increase your credit scores.

Of all the credit card myths out there, this one is the biggest.  It is the most common piece of advice that people are given as a solution for low credit scores.  Not only is it not true, it can actually do a great deal of damage to your credit score.

The reason it can be so damaging is because of a measurement called “revolving utilization’ that credit scoring models use.  This is the way that revolving utilization works.  If you have 10 credit cards with a credit limit of $1000 each, you have an aggregate credit limit of $10,000.  If three of these cards are maxed out, then you have an aggregate credit card balance of $3000.  This would give you a revolving utilization of 30% ($3000 divided by $10,000=.30).  The seven cards that you are not using keeps your revolving utilization number low.

If you close out those seven unused cards anyway, you will have three maxed out credit cards.  This means that your revolving utilization is 100% and your credit scores are now in the basement.

This example may be exaggerated, but no matter how many cards you have or what the limits are, closing unused credit accounts almost always damages your credit scores.

If you have closed your unused credit card accounts you can repair the damage, but they will all have unavoidable negative consequences.

Try to reopen the seven accounts that you just closed.  Of course, it won’t be as simple as closing them was.  The lenders will pull your credit report, which could lower your score, and with a high revolving utilization number, you may not be able to open all the accounts.  It will also show on your credit report that you opened seven new accounts.

Request a credit increase on your remaining cards.  Your creditors may deny your request and they will pull your credit report, which will result in new inquiries on your credit report.

These credit myths can be damaging to your credit report and credit score if they acted on without confirmation of the consequences.  Repairing a damaged credit history and improving a credit score is not an overwhelming endeavor but it does take knowledge and proper action to achieve the optimal results.