Here are some of the most common myths concerning credit reports.
1) I haven’t done anything wrong so my credit reports must be OK. Your credit reports may have errors that affect your credit standing even if you did nothing to cause the errors. By some estimates, 70% of credit reports have errors. The errors may be lowering your credit score, which will mean you may have to pay a higher interest rate on credit. Morale to this story is to periodically download your credit reports and check for errors. If you find any errors, send dispute letters to the credit reporting agency.
2) Checking credit reports will hurt my credit score. You may check your own credit report as often as you like. There will be effect on your credit score. Confusion may arise from the fact that when you apply for credit and the creditor pulls your credit report, a hard inquiry will appear on your credit report. Excessive numbers of hard inquiries will lower your score somewhat. If you are shopping for a mortgage or car, you may end up with a lot of inquiries, but FICO, the leading source of credit scores, will count inquiries for a car or mortgage in any 30 day period as just one inquiry.
3) If you pay off a delinquent debt, a missed or late payment will be removed from your credit report. Paying off a debt will not remove negative history. The debt will fall off your report once 7 years is passed from the date for first delinquency. Do not believe credit repair companies that promise they can get negative accounts removed.
4) It will help my credit score if I make a payment on an old debt. Payment on an old debt or even paying it off is usually not a good idea. The negative history on the account won’t disappear from your credit report. Plus you risk restarting the statute of limitations in some cases. Paying off a recently incurred debt may make sense. While the history will not disappear, the balance due will reduce to zero which is a positive in terms of your credit score.
5) I need assistance of a debt settlement company. Don’t even think about it. These guys are scam artists. You will just be throwing money away. If you want to negotiate settlements with your creditors, do it yourself. Debt collectors will typically settle debts for some percentage of the debt.
6) It is a good idea to close a credit card account after paying it off. This can actually hurt your score–it eliminates some of your credit history, which is about 15% of your credit score. Plus, closing a credit card account means your utilization or debt to credit ratio will worsen. You can always cut up the card and not use it.
7) Keeping a balance on credit cards improves the credit score. Keeping a balance only costs you interest. Opening a credit card and keeping payments current can help build your credit history if you don’t have much credit history.
8) Daily credit monitoring is good idea. Some people like daily monitoring, but it is expensive and you can check your own credit reports from Experian, Equifax and Trans Union once a year for free at www.annualcreditreport.com. You can download one of them every four months for free.
9) You cannot get credit if you file bankruptcy. You may be able to get some credit, but it will be costly.
10) All credit scores are alike. FICO is a company that provides the scores most commonly used by creditors. The scores provided by Experian, Equifax , Trans Union and many others are not used all that often by creditors. Which is why they are sometimes called “fako” scores.