Maintaining credit isn’t easy. Even complete financial stability does
not guarantee that your status will be reflected in your score. An extremely
wealthy person with no debt can have a horrible credit score. That’s because
scoring models don’t consider your income when deciding your credit worthiness.
If that wealthy person does not have different types of credit accounts that
are paid on time and reported to the credit bureaus they could even have no score at all. Scoring models
determine your credit worthiness on factors including number of accounts,
payment of accounts and credit utilization. Bureaus do not publicly report the
calculations that determine your score and while experts have over
the years made educated guesses on the components behind their models, it is by no means definitive.
An obscure system such as this leaves plenty of room for misinformation. Here
the top ten myths that could be hurting your score right now.
MYTH #1: CHECKING
MY CREDIT HURTS MY SCORE
A common credit myth is
that credit checks damage your score. Holy moly this one’s a whopper. This is
one of the most detrimental credit myths. Its foothold on the psyche of credit
consumer has prevented multitudes from educating themselves about their credit
rating. How can you maintain or improve your credit rating if you’re too afraid
to check it? It’s important to understand that there is more than one type of
credit pull, because credit is accessed for two different reasons. A “soft
pull” is used to simply access information from your report. Soft pulls are
used to check your own credit, or when you apply for a job and complete a
background check. It’s also the same type of pull that is performed so that credit
card companies can pre-approve you for offers. Soft inquires can occur often
and even without your express permission. A soft pull has no effect whatsoever
on your credit score. That needs said again: A soft pull has no effect
whatsoever on your credit score. “Hard pulls” are used when you’re actual
taking financial action like applying for a credit card or loan. It’s when a
lender is making an actual decision about opening a credit account. Still
confused? An easier way to understand the difference between hard and soft
pulls is that a soft pull is simply for informational purposes. A hard pull is
a pull with intent to actually open a new credit account. But even hard
inquires have a very small effect (a few points if any) on your score and are
temporary. Additionally, new changes to the scoring system can detect when
you're shopping around for a car loan for example. FICO now has a system in
place where multiple hard pulls are scored as a single request if made within a
45-day period. They have adjusted the model to account for when consumers are
loan shopping. As long as you're not opening multiple accounts in that 45-day
window, it will be calculated as a single pull. From myfico.com "FICO
scores distinguish between a search for a single loan and a search for many new
credit lines, in part by the length of time over which inquiries occur."
Soft pulls have no effect
on your score. As a matter of fact, go do that right now if you haven’t… Take
your pick. AnnualCreditReport.com is the site managed by
the credit bureau to allow you a FREE copy of your credit report once per year
as required by federal law but recently a multitude of sites like Credit Karma,
Credit Sesame and Credit.com offer free access to your report and score. It’s
really, truly free and are loaded with credit tools and recommendations to
repair your credit.
MYTH #2: I HAVE ONE CREDIT SCORE
A common credit myth is that
there is one score that all creditors use to determine your credit worthiness. There’s your FICO Score which
ranges from 300-850, Experian ranges from 330-830, Equifax ranges 300-850,
Transunion and the Vantage Score 3.0 which ranges from 300-850. When you get
into credit helping sites, many of them have their own scoring system which is
based off of the national scoring models but is not exactly the same. Some
lenders have custom scoring models based on the type of credit they offer.
Different credit holders report to different bureaus. Your score with Equifax
can be significantly higher or lower depending on the credit companies you use
and which companies report to where. Most lenders use an average of your three
Fico scores with Experian, Equifax and Transunion so it’s important to make
sure your credit information is correct with all three bureaus.
MYTH #3: AFTER
SEVEN YEARS BAD ACCOUNTS AUTOMATICALLY DISAPPEAR
It’s true that credit
bureaus are governed by the Fair Credit Reporting Act’s (FCRA) rules that
limit the time a negative report can remain on your bureau. The confusion comes
when understanding the time limit by account type and more importantly when
that clock starts ticking.
Regular credit accounts, civil judgements and tax liens
can be reported for seven years. Chapter 11 Bankruptcy can report for ten
years. One exemption to the seven-year rule is credit transactions involving
150,000 or more and “to items of information added to the file of a consumer on
or after the date that is 455 days after September 30, 1996”.
So the seven-year rule is
an actual rule. Most of the confusion for consumers comes in this paragraph of
the code “The 7-year period... with respect to any delinquent account that is
placed for collection, charged to profit and loss, or subjected to any similar
action, upon the expiration of the 180-day period beginning on the date of the
commencement of the delinquency which immediately preceded the collection
activity, charge to profit and loss, or similar action.”
Credit companies will report late payments immediately,
but the seven-year clock does not start until the account was delinquent 180
days, so the account will remain on your credit report for seven years and six
months since you stopped paying the account.
The credit bureaus are
bound by the rules in the FCRA so if you have an account on your report that
isn’t complying with these regulations, you should contact the bureaus and have
MYTH #4: INCREASING
MY INCOME INCREASES MY SCORE
Credit scoring models do
not consider your income. Credit scores are based off of account reporting to
the three credit agencies. While income is a consideration for ability to pay,
it’s not an indication of your creditworthiness. Think about it. A person that
makes $500,000.00 per year could have plenty of credit and manage it poorly.
Just as someone who makes $30,000.00 per year could have plenty of accounts and
manage them perfectly. Income is important to lending and many lenders will
consider your income when you’re applying for things like a car loan or
mortgage but they consider those things during the application process, not
from your bureau.
MYTH #5: CARRYING
A BALANCE HELPS MY SCORE
In no way shape or form
does it help your score to carry a balance and it could cost you big in finance
charges that you would have avoided. The confusion likely started with the
definition of “carry a balance”. If you think carrying a balance is leaving an
unpaid amount on your card to “carry over” to the next billing cycle, then
carrying a balance is not good. Actually it’s bad. If you think carrying a
balance means using your credit card so that there is activity and paying it
off before the cycle bills, then good! You understand that adding debt is never
good for your credit. Your “credit utilization” is a hefty part of your score.
It accounts for 30% of consideration. Credit utilization is simply the ration
between the amount you owe and the amount available to you. For example, if you
have 3 credit cards with a 10,000 limit each you have 30,000 in available
credit. If you have a 2,000 balance between those three cards your utilization
would be 6%. With 0% being a perfect utilization score, you can see that
carrying balances as defined above would be detrimental to your credit rating.
The confusion likely came from a good place where well intended people confused
carrying a balance with using your credit. You want to use your credit. If
possible you want to use all of your credit accounts for purchases at least
once a month to keep the account active and allow the credit card companies to
compete a bill cycle but paying that bill before cycle will allow your
utilization ratio to remain low and avoid any interest charges you would accrue
by “carrying a balance”.
MYTH #6: PAYING
OFF AN INSTALLMENT LOAN EARLY HELPS MY CREDIT
Installment loans like used car loans or personal loans are the best
way to raise your score. They add another account to your bureau and add to the
diversification of your account types. Unlike revolving credit accounts like
credit cards, they do not effect utilization. They are so good for your score
that paying them off early may actually have a negative effect. Paying it off
early closes the account, and all that rich payment reporting each much will be
cut short. An open account paid well a much better account type for your credit
score. Keep them open and pay on time!
MYTH #7: CREDIT
BUREAUS CONSIDER RACE, AGE AND SEX
Most reasonable people know
that race does not affect your score but sex and age? While the credit bureaus
do retain information like age and sex, they are prohibited by law from
considering those factors in any scoring model. The Equal Opportunity Act
prevents it. Lending decisions are not allowed to be based in any way on your
race, religion, national origin, marital status, age or sex.
MYTH #8: WELL
PAID UTILITY ACCOUNTS HELP MY SCORE
Well they would… If they
report it. One would reasonably assume that if they pay a phone, gas, water and
electric bill each month that would be reported on their bureau. Many people
assume that the bills they are paying each month like utility bills are
reported but they would in most cases be wrong. Most utility companies do not
report consumer’s regular utility payments. There’s nothing legally stopping
them. They could report like any other business that accepts payments. Most
utility companies choose not to report and they have their reasons. The moment
a utility company begins report payments, they are instantly bound by the FCRA.
They must perform investigations when a dispute is initiated as required by the
law. They must provide the maximum accuracy of what they’re reporting as
required by the law. You could also argue that they don’t have a need to
report. When you stop paying your gas bill it won’t be long before a little
truck shows up to shut it off. Their services are more of a necessity, and
simply the threat of losing the service is enough to get people to pay. Even
though they mostly don’t report good accounts, there is a possibility that they
will report a delinquent account or one that is closed with money owed.
MYTH #9: ALL
CREDIT CARDS ARE THE SAME
Not true! Some credit cards
report to one bureau. Others report to all three. Some report detailed payment
history and some not so much. If you’re trying to rebuild credit find a card
that reports to all three bureaus and includes your payment history. A well
paid credit card is great. A well paid credit card that reports to all three
bureaus is tremendous for helping your overall average score. It’s easy to find
out how each credit card reports. Search for reviews on the card you’re
considering. Sites like Credit Karma will have reviews from others who have
actually used the card. They report things like their credit score when
approved, reporting of the company, limit amounts, customer service and
interest rates. Always do your research before opening a new card.
MYTH #10: THE
CREDIT BUREAUS ARE A PART OF THE FEDERAL GOVERNMENT
While the Federal
government regulates many actions and policies of the credit bureaus, they are
private entities. And they are not non-profit companies. They are privately and
publicly held for profit corporations. They look to maximize profits like any
other private company. They make money by selling credit information to
individuals and lenders and by charging companies to report credit accounts.
Creditors have to pay to report your account, which is why a small debt you owe
to a local business is much less likely to be reported. Some of the bureaus
have minimum account reporting requirements which excludes smaller companies.
This is all the more reason it’s important for you to monitor your score. You
may pay plenty of people on time and in full but if that company does not
report unless you are delinquent, there’s no benefit to your score.
Content By:The Used Car Store