Credit Myths

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Checking your FICO score can hurt your credit Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn’t count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also are not going to hurt you, either – unless you actually take them up on their offers. If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 45 day period as just one inquiry and ignores all inquiries mad within 30 days prior to the day the score is computed. Making a lot of money will help your credit report and your credit scores. It is amazing how many people will say “do you know how much I make” when they get decline letters in the mail or do not get the best interest rates or the highest credit limits. The assumption is that an impressive salary leads to a great credit report and credit score. The fact of the matter is that your salary has nothing to do with your credit reports or credit scores. Now that does not mean that a great paycheck ill not help you qualify for the credit you desire. It will. But not like you may think. Your salary is important to lenders but not important in a credit worthiness way. It is important for them to know that you have the ability to make the payments that you are going to be saddled with for the next 5, 10,or 30 years. That is called “capacity.” Lenders use your salary as a measurement of you capacity to make the required monthly payments. Your credit reports and credit scores are how lenders determine your credit worthiness. One is as important as the other but you will not be approved for the best interest rates if your credit stinks…regardless of how much money you make. So, congratulations on that killer W2 …but do not think that is all that matters. Paying cash for everything will help your credit rating. We call this “credit avoidance” and for some reason people think that it is a good idea. The cash and carry crowd has it wrong here. You have to have some sort of history of responsible credit use in order to establish solid credit histories and credit scores. If you do not establish and maintain various types of credit accounts then your scores will not be as good as someone with a long history of responsible credit use. Surprise surprise!! The next logical comment is “will, if I do not ever plan on using credit then why would I need a good credit history?” Come on. Can anyone reading this seriously tell me that they function efficiently without any sort of credit? That would mean that you paid cash for your house and cars, do not rent movies at the local rental store that requires a credit card number on file, do not ever buy anything online and carry around gobs of cash when you go on vacation. I do not think so. Credit use is not bad. Credit abuse is bad. Please do not think that using cash for everything is somehow better than using credit responsibly. It simply is not. A great credit score is a result of a credit report WITHOUT any late payments. Paying all of your bills on time is a great start. And, you will not have excellent credit reports and scores without a clean payment history. But, it is not the only thing. In fact, it is only 1/3rd of the equation. A full 2/3rd of your credit score is derived from things other than how well you pay your bills. That is quite a surprise, especially to someone who is in a incredible amount of debt but somehow struggles to make their minimum payments every month. This person is referred to in the credit world as a “ticking time bomb.” It is just a matter of time before it goes off. If you want to have the best scores possible you must perform will in not only making your payments on time but by also staying out of overwhelming debt. A divorce decree will absolve you of your credit responsibilities. Going through a divorce is difficult enough without having to worry about dividing credit debt. Unfortunately, it is certainly one of the most important items to focus on as you are proceeding through a divorce. Generally part of the process is dividing the credit debts. Here the judge will decree that one or the other spouse will be responsible for making payments on car loans, mortgages, credit cards and other credit obligations. That is fine but the judge’s decree does not override the contract that you signed with your creditors. So, if you and your spouse both signed to take out a mortgage or a car loan and it stops being paid by the newly responsible party then both of you will suffer. The lender will almost certainly report the late payments on both of your credit reports and if the account goes seriously delinquent or even into the dreaded collection status then your scores will suffer for years despite what the judge said. All three of your credit reports and credit scores will be the same. Nope. In fact, the opposite is almost a guarantee. It is a certainty that all three of your credit reports will be different and, therefore, so will all three of your credit scores. There are three primary reasons why this is so. They are… Not all of your accounts will be reported to all three credit reporting agencies. Since reporting is a voluntary act, ant all lenders report to all three. You will most certainly have a different number of inquiries on your three credit reports. An inquiry is a record of when someone or some company accesses your credit report. Since most lenders just pull one of your three credit reports (except for mortgage lenders) you will have a different number of inquiries on your reports. Lenders do not always update their accounts on your credit reports at the same time. For example, Dave’s Bank might update their accounts at Equifax the first week of the month, Experian the second week and TransUnion the forth week. It is because of all these reasons that your credit reports and scores will not be the same across the board. If you have poor credit then your credit scores will suffer for seven years. Fortunately for those who have had credit problems in the past this is not exactly true. The way the credit scoring systems are designed allows consumers to start improving their scores very quickly, months later in some cases. The credit scoring systems are dynamic, meaning that the scores are calculated based on your credit information as of that time. If the information on your credit files changes tomorrow, then so will your scores. This is good news especially for folks who are about to pay off a large chunk of their credit card debt or ar able to have negative information removed from their credit reports. You should see immediate improvement in your scores. No waiting required. Check Cards can help your credit reports and scores. This is not true. Check cards (also known as Debit Cards) are nothing more than plastic access to your checking account. Since checking accounts are not recognized as an extension of credit then they do not end up on your credit reports. The confusion comes in part because of the Visa or MasterCard logos that are on the debit card. They look exactly like credit cards so the assumption is that they count. The bad news here is that they could hurt you if you are not careful with how you use and manage them. If you become overdrawn on your checking account because you do not track the use of your check card then it could result in bounced checks. And since there are companies that track and report poor checking account management any abuse could come back to haunt you. Moving your credit card balances around will help you hide your debt from the credit scoring models. Credit scoring models are much smarter than people give them credit for. It is impossible to hide your credit card debt. There is a measurement taken every time your credit score is calculated called “total revolving debt.” This is total amount that you currently owe your credit card companies. The problem for people with a lot of different credit cards with balances is that this is an aggregate measurement. This means that if you have 10 credit cards each with $1000 balances or 5 credit cards each with $2000 balances then you are still going to have $10,000 in revolving debt. And, if you opened a new “no interest for 12 months” credit card and consolidated the $10,000 onto that one account then guess what…you still have $10,000 in revolving debt. You simply can not hide it unless, of course, you pay it off. Paying off (or “settling”) late payments, tax liens, collections or judgments will remove them from your credit reports. It is not that easy. While it is the responsible and right thing to do, do not expect any miracles to occur just because you pay off some or all of your negative credit related debs. For some reason people think that by paying these things off they will somehow disappear like they never happened. No, no, no, no. They are not going anywhere for seven years in most cases. They will be updated on your credit reports to show “paid collection” or “released tax lien” or “satisfied judgment”, whish is much better than the alternative but they will still be there negatively impaction your credit scores. This myth is commonly abused by collection agencies that offer to have your collections removed from your credit reports if you will pay them off. It sounds like a good deal but unfortunately in order for them to be completely removed they must be erroneous. If you ever have the occasion to speak with someone from any of the tree credit reporting agencies as