Common Myths about Credit & The Real Truth

I read an interesting email this week from my friend Jon Adams at Credit1Source about common credit myths and the real truth behind them - I thought this was a great read and debunking of common myths that would be good to hear for my home buyers out there!

Myth: Closing credit cards will boost credit scores

Actually: Just the opposite will take place. There are several things to consider when contemplating closing credit cards. If the card is several years old and decided to close the card could severely impact scores. The history, limit, creditor the card is will could impact scores between 40 to 160 points. For example, a card with American Express opened in 1979, has been consistently used throughout the years. Currently has a limit of $20,000, with a balance of $5,000. By closing the account the scores could drop about 140 points and the monthly bonus points dropped by 25 points. If a person has a credit mid-score 695 after closing their well-seasoned credit card scores would drop to mid-score of 520-540. 

Well-seasoned credit cards should not be closed. They are creating positive scores and history that is useful to one’s credit file. Definitely encourage someone not wanting to use the card to simply stop using it or use it sparsely by spending a few dollars a month and pay it down. 

Myth: Majority of errors on credit reports have to do with amounts paid or owed.

Actually: Majority of errors on credit reports have to do with creditors/collection agencies not reporting the information accurately. This inaccurately reported information can continue to haunt a person’s credit file several years until it is purged or the person highlights the errors and get the reporting agencies to correct the inaccuracies. 

Creditor or collection agencies are very quick to report the derogatory account but extremely slow to report the correction – whether the account has been paid, settled, issued a 1099C, sold or transferred to a different company; or simply ceased all collection efforts. The creditors or collection agencies have a tendency to fail or forget to report the updated information or remove the derogatory off of the person’s credit file. 

Myth: Paying off all prior debt will help increase scores

Actually: If a person now has the means to pay prior debt, they should be strategic in their approach. There are a few things to consider when seeking resolving past debt: 

1)When was the last payment made? This is extremely important to know because debt that is beyond the statute of limitations should be avoided. If making a payment arrangement in this situation, the statute of limitation could be restarted. Therefore the creditor, could seek a legal action sooner rather than later. Also if the debt is beyond two years from the present date, this could potentially have scores decreasing. The reason why it could decrease is because the reporting agency could question WHY it took the debtor so long to pay the account. 

2)What type of debt is it? This is equally important those debts seeking to pay/settle should be ones that will have score value and not just paying them to pay them. Would suggest leaving medical ones alone. Now if you reside in a state, like South Carolina, medical expenses could be turned into state tax liens which then could have wages garnished, taxes seized, etc, would suggest negotiating a settlement and resolving the debt as soon as possible. For accounts that are revolving, installment loans, utility accounts or student loans would recommend negotiating a settlement and taking care of these accounts. These types of debts have score value potential, newer listed collection accounts have higher score value than those that are older. It’s a combination between the date opened and the date of last activity. 

Myth: Missing one payment is no big deal, since never missed a payment before

Actually: This is a big deal; missing any payments can be devastating to credit scores. Late payments to rolling 30 days lates and those payments that move into 60, 90 and 120 day lates all devastating to a person’s credit file and scores. Definitely encourage the debtor to contact the creditor as soon as they realize the payment will be late to discuss options. Many creditors can move payments around, provide extra days, etc to make that payment on-time. Do not just rely on the creditor to simply forgive you as they do not have any information from you to help you with resolving the payment.

Myth: Once you are married credit scores are shared

Actually: Your score is your score and your spouse’s scores are their own there is no comingling of scores or credit file information. The only time things are shared is if the couple is joint on the account(s), then that information is shared on both credit files and affect scores. However, the impact for scores are not the same it will be different based on individual information listed on each person’s credit file.

Myth: It’s illegal for employers to check credit reports before hiring someone

Actually: This is pretty common reason to check the applicant’s financial stability and debt. Most employers who check this information are those hiring for managers or those that will require access to large amount of money or sensitive information. 

Myth: Having several credit cards, does not matter how much is charged on them

Actually: This absolutely matters credit utilization should be below 30%. If credit card balances are above 30% of limit this should be reduced immediately. Utilization should be below 30% of limit, this will be a quick way to increase credit scores in the short-term.

Myth: In a short period of time, obtaining several new credit cards will not affect my scores

Actually: This could cause harm to scores, there are several factors when applying for credit cards in a short-period of time. Some things to consider:

1)Inquiry on credit report? Is this a soft pull or hard pull? Most credit card companies will do a soft pull, this could be worth 1 to 5 points and only active on the inquiry list for six months. Now if the person applied for 10 credit cards without being strategic, simply applying to apply. This could have scores decreasing anywhere from 10 to 100 points

2)Creditors? Varying creditors have varying degrees of value – Creditors reviewing applications could also determine the applicant could potentially go on a “borrowing binge.” This is where the applicant could max out all the accounts therefore leaving the creditor at a loss.

Myth: Being an authorized user on an account will give scores a boost

Actually: This is going to depend on a few things:

1)Be sure you know the person: This is extremely dangerous ground, the authorized user labeling provides a few points towards scores; however, the negative aspect of the account is highlighted and hurts as though the authorized user was actually a joint person on the account.

2)Lack of Control: Not having control over payments, charging on the account, and keeping the account under control will be up to someone else’s discretion. It may be easier to simply apply for a secured credit card and begin rebuild the credit.

3)Balance versus Limit: If the balance is well-above 30% of limit, it would be best to be removed as an authorized user. This will hurt scores more than help.

Myth Pre-paid cards are the same at credit cards

Actually: Pre-paid cards do not behave the same as credit cards. Pre-paid cards are not reportable; these accounts are not reported to the reporting agencies. Credit cards, whether secured or unsecured, typically report to all three reporting agencies. Best to get a credit card to assist with possibly enhancing or improving credit scores. 

Myth: Obtaining an installment loan will help my credit in the short term

Actually: In a very technical aspect, installments should help with improving scores, but it takes 6 to 8 months of on-time current payments before improving scores. Also initially when obtaining the new installment loan it will hurt a person’s credit score decreasing scores anywhere from 40 t0 120 points. Again once all payments have been made on-time for 6 to 8 months the points taken will be returned with a little extra.