I ran across an article by Mary Fetzer that I tough was worth sharing with you:
10 Falsehoods About Credit That Can Cost You.
Facts and Falsehoods
When it comes to finances, it’s important to know where you stand — especially with something as important as your credit score. Are you clear on how to boost your score? “You have to be careful who you listen to,” says Dan Beck, president of Credit Management Specialists, a credit-restoration company in Greeley, Colorado. “Following the wrong advice can impact your score in a negative way.” Here, we present the 10 most common (and most costly) falsehoods about credit.
Falsehood No. 1: I have one credit score, and it’s locked in for a year.
Fact: The three credit reporting agencies — Equifax, Experian, and Trans-Union — operate independently and do not share data. “The information each reports is very different,” says Kate Lister, author of Finding Money. Accordingly, your credit reports and scores will differ from one agency to another, which is why Lister recommends getting a copy of each report every time you check your credit. And because your score is constantly changing (it’s recalculated whenever your credit report is pulled), “Review your credit report at least every six months to look for inaccuracies,” says Ann-Marie Murphy, co-founder of Quizzle, a credit-management site for consumers.
Falsehood No. 2: I shouldn’t check my credit too often, because a lot of inquiries can lower my score.
Fact: “You can check your credit report through a credit bureau as often as you like with no negative impact,” says Lynnette Khalfani Cox, a personal-finance expert. Checking your own credit is considered a “soft inquiry,” which has no bearing on your credit score. Other soft inquiries are those made by existing lenders reviewing your account and lenders trying to offer you pre-approved credit.
Falsehood No. 3: Closing unused accounts lowers my available credit and will improve my score.
Fact: Not so. While it feels fiscally responsible to close out an account that’s at zero, it’s actually a big zero for your score. “Credit utilization is how much credit you use compared to how much credit is available to you,” Murphy says. By closing accounts, you’re decreasing the amount of credit available to you, so your proportion of credit used will be higher — and that makes you a higher risk in the eyes of lenders, she says. And closing old accounts also removes your history, one of the biggest things that factor into credit score, Lister says. “If you cancel a credit card that has a lot of history, you may hurt your score,” Lister says.
Falsehood No. 4: Paying cash and carrying no debt will help my credit score.
Fact: “Having no credit history or never using credit has a negative impact on your credit score,” says Cox. “FICO reports that people with no credit cards tend to be higher risk than those who use credit cards responsibly.” The longer you have an account and pay on time, the greater the benefit to your score.
Falsehood No. 5: All debt is created equal.
Fact: Various types of credit will impact your score differently, and 10 percent of your score refers to your mix of credit. “If you are heavy in one area of credit, your score may be lower,” says Hallie Hawkins, co-founder the Certified Credit Report Reviewer Certification Program with the Institute of Consumer Financial Education. But the credit-scoring systems are chiefly concerned with credit-card debt. Though your mortgage or student loans are important, “Focus on lowering your credit card utilization in order to get a big boost in your scores,” Cox says. “Having a big credit-card debt will hurt you.”
Falsehood No. 6: Paying off my credit-card balances every month improves my credit score.
Fact: Not necessarily. “When you pay off your credit-card bill, the bank doesn’t notify the credit bureaus,” says Wayne Sanford, author of The Credit Reality Today. And if your credit is pulled mid-month, before you pay your bill, your score will reflect that balance. “The only way to be sure your balance shows as zero is to cease using the card for a month or more,” says John Rackley, a certified mortgage-planning specialist. “Unfortunately, this is an example of how someone who handles their credit responsibly can be penalized by the credit-scoring system.”
Falsehood No. 7: If my debt is less than 30 percent of my income, it has a positive effect on my score.
Fact: The credit-scoring agency has no record of your income, and is therefore not factored into your credit score, says credit administrator Michele Brander. What’s vital is that you establish your ability to pay your debts on time.
Falsehood No. 8: Incorrect personal information negatively impacts my score.
Fact: Your personal information has no impact on your credit score. “Income, employment history, race, religion, national origin, gender, marital status, and age are not factors in credit scoring,” Brander says.
Falsehood No. 9: Once a collections account is settled, derogatory information will be removed from my report.
Fact: Paying a collection account in full is the fiscally responsible thing to do, but it won’t make the collection red mark on your report go away. The account may be marked as paid in full, which is important, but it will remain on your credit report for seven years, says Hawkins.
Falsehood No. 10: One missed payment won’t hurt my credit score.
Fact: Think again before you flake out on that one payment. “The single biggest determinant of your credit score is how well you’ve paid your bills in the past,” says Cox. Credit-scoring formulas take into account your late payments, how late they were, and how long ago the late payments occurred.
Free of Falsehoods
“Ignorance is not bliss when it comes to your credit score,” says Murphy. Now that you’re free of falsehoods and armed with facts, you can take complete control of your credit score.
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