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: Settling or paying off tax liens, collections, late payments or judgments will erase them from your credit reports.
This is false. By paying off these types of accounts, in most cases, you will actually see your credit scores drop significantly. The reason for this is because what you have effectively done is bring an old negative trade line to current status. A more recent negative item will cost your more points on your credit than an old negative item.
Myth 2: Paying my full credit card balance every month will improve my credit scores.
If the credit system were designed by your financial advisor, this would be a great plan, however, since the system was designed by your creditors, in order to maximize your credit scores, you need to give them what they want to see. What the credit card companies like is for a client to pay only a little more than the minimum payment, on time, every month. Occasionally paying down your balances slightly is ok. This behavior will maximize your credit scores.
Myth 3: Credit repair is not legal.
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: Credit Counseling (CCCS) programs will raise my credit scores.
We have all seen the statements made by credit counseling companies that state that their program will improve your credit. I can tell you that this is false. When you enroll into a credit counseling program, one of the first things that happens is a statement is inserted into your credit reports for each account included in the program. This statement will say something like “payments made through credit counseling”, or “client in CCCS”. This statement itself may not cost you any points; however it is looked at by the lending industry as very negative. It is like putting a sign on your forehead that says, “I can’t pay my bills!” In addition, most credit counseling programs will make your payments late, and this will then cause you to have late-pays, which will cost you many points on your credit.
Myth 5: Negative items have to stay on my credit for 7 years because that is the law.
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: If you make a lot of money, you will have great 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: As long as I have never been late on a payment, I will 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: When you get married, your credit reports will be merged with your spouse.
This is completely false. All individuals will always have their own individual credit history. If you have joint accounts, you may share some of the same trade lines, but it is still your credit.
Myth 10: If I close my old credit accounts, my scores will increase.
This is often a huge surprise for many. When you close old accounts, your scores will often drop substantially, sometimes by more than 100 points. Often a lender will ask you to close some old accounts to qualify for a loan, but once the accounts are closed, your scores may actually prohibit you from qualifying. This is good knowledge for to know so you understand the impact of this decision. Old good standing accounts carry more positive weight on your credit scores than newer accounts. When you open new credit, you may also see a temporary drop in scores until those accounts have seasoned (usually 6-12 months).
You are now armed with some very powerful information that will surely be able to use to your advantage.
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