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15 Huge Credit Myths - And Why the Bureaus Prefer They Stay Hidden
In the past, most people could only guess at what helped or hurt their credit scores. The creators of the credit scores worked very hard to maintain a shroud of secrecy about their scoring models for two main reasons - each designed to protect their profits. They did not want their competitors to learn and copy their ideas, and they certainly did not want consumers to figure out ways to beat the system. Either of these would result in the credit scores being useless and the credit scoring companies going out of business.
Today, we know much more about how the credit bureaus and their scoring models work. Here are the biggest myths of credit scores and credit repair.
Myth # 1: The credit bureaus are a branch of the government, infallible, and above reproach.
The credit bureaus are publicly traded "for profit" companies. They are not government agencies. But, they are one of the most heavily regulated industries. The strict regulations stem from a public outcry of abuses and mistakes.
A recent survey by an independent research group revealed more than 79% of credit reports contained mistakes or errors. The prevalence of errors has lead to consumer protection legislation that allows consumers to challenge the bureaus and force the removal of inaccurate, outdated or unverifiable information.
Myth # 2: When I pay off a past-due account, such as a charge off or a collection account, it will show "paid" and no longer be a negative.
It is difficult to fully restore your credit without paying your outstanding debts. However, paying off a debt can actually hurt your credit. Negative items on your credit report are allowed to stay on your credit report for a maximum of seven (7) years, except for bankruptcy that can stay for up to ten (10) years. This 7 or 10-year clock begins ticking at the date of last activity. Making a payment represents new activity and restarts the clock.
Myth # 3: Closing an account will help your score.
This may sound logical, especially when a mortgage broker tells you that lenders are suspicious of people who have lots of unused credit available to them. The reasoning they offer is: what's to keep you, after all, from rushing out and charging up all your credit?
Of course, when you think about it, what has kept you from already doing this? Simple: if you have been responsible with credit in the past, the chances are that you are likely to continue to be responsible in the future. After all, that is the basic principle behind credit scoring. It rewards behaviors that show moderate and responsible use of credit over time, because those habits are likely to continue.
The score also punishes behavior that's not responsible, such as applying for a lot of credit you don't need. Many people with high credit scores find that one of the few marks against them in their reason codes is the number of credit accounts listed on their reports. When they go to get their credit scores, they're told that one of the reasons their score isn't even higher is that they have "too many open accounts." Many then erroneously assume they can fix this problem by closing accounts. But after you've opened the accounts, the damage has been already done according to the scoring models.
Myth #4: You can boost your scores by asking your credit card company to lower your limit.
This is a variation on the idea that reducing your available credit somehow helps your score by making you seem less risky to lenders. Narrowing the gap between the credit you use and the credit you have available to you can have a negative effect on your score. On the other hand, increasing the gap between your balance and your credit limit has a positive effect on your score.
Myth #5: You can hurt your score by checking your own credit.
The folks at Fair Isaac understand your need to review your own data, which is why the FICO formula ignores any inquiries generated when you check your own reports and scores. But, where you can hurt your scores is if you ask a lender to check your score for you. When a lender pulls your credit, it generates what's known as "hard" inquiry and those are counted against your scores.
Myth #6: You don't have to use credit to have a high score.
Unfortunately, there are some people who are so suspicious of credit that they advise giving up credit cards and living on a cash-only basis. They acknowledge that most people need mortgages and auto loans, but they feel the best way to impress a lender is by living a credit-free lifestyle. This is unfortunate, because it is just plain wrong.
The credit scoring formula is designed to judge how well you handle credit over time. If you have no credit, or you don't at least occasionally use the credit you have, the formula won't have enough information to generate a score for you. You don't need to live in debt to get a decent score, but you do need to use credit.
Myth #7: You have to pay a lot of interest to have high scores.
This is the exact opposite of the previous myth, and it's just as misguided. You don't need to carry a balance on your credit cards and pay interest to have a good score. The FICO formula makes no distinction between balances you carry month to month and balances that you pay off - as long as the balances are not excessive. Smart consumers don't carry credit card balances for any reason, and certainly not to improve their scores.
Myth #8: If I build enough good credit, it will offset my bad credit and make me credit worthy.
Any amount of bad credit can be devastating to your chances of being approved by a creditor. The approval is almost never in the hands of a human sitting across a desk from you. It is now most often a computer achieving a point total score for you. The slightest amount of negative credit can cause a loan's interest rate to skyrocket.
Myth # 9: There are items such as bankruptcies, foreclosures, and tax liens that are impossible to remove from the credit report.
It is important to remember that there is absolutely no requirement or law that says any item must be on your credit report. Since there is no requirement that an item be on your credit report, there is no law or rule that says that same item cannot be removed. The only "rules" that bureaus follow are ones that are designed to protect their profits. It is possible to have any type of item removed from a credit report with the right effort.
Myth # 10: Disputing a credit report is easy - any consumer can do it themselves.
Disputing a credit report is easy. Getting results from the credit bureaus as a layperson is amazingly difficult, complex, and infuriating. The Federal Trade Commission receives more complaints against credit bureaus than any other type of business. In February 2000, the 3 major credit bureaus paid a fine of 2.5 million dollars for ignoring consumers requesting information regarding their file.
Restoring your own credit is like representing yourself in court; it is possible, but you have to be willing to invest the time to learn the processes, assume the risks of inexperience and realize that it will probably take you much longer. And you will be considerably less effective than a professional. But, it can be done - there are no rules of any kind against it.
Myth # 11: The credit bureau allows me to submit my 100-word explanation. Creditors will read my statement and take it into consideration.
No known creditors consider the information submitted in your statement. This statement only verifies some of the negative items on your report. The 100-word explanation should never be added, and it should be the first thing deleted from your credit file.
Myth # 12: If a negative item is successfully deleted from my credit report, it will just come right back on my report.
In truth, the credit bureaus will often temporarily delete a negative listing if they have not heard from the credit grantor for 30 days since an item has been disputed. Should the credit grantor submit verification a week or two later, it will be re-inserted. (This is called a soft delete.) Most of the time the creditor simply fails to respond and the negative item is permanently deleted.
Myth # 13: I can create a totally new credit file by getting a federal tax ID number or changing a few numbers on my social security number.
This fraudulent scheme has proven to be complex, difficult and illegal. Lying on a credit application is a criminal offense and with the linking of computer systems it is virtually impossible to get away with.
Myth # 14: Nonprofit organizations like Consumer Credit Counseling Service (CCCS) can help me restore my credit.
Nonprofit debt counseling services assist people who are over their heads in debt and seeking an alternative to bankruptcy. CCCS are funded and controlled by credit grantors and credit bureaus. When you are working with CCCS your creditors will often note this on your credit report. This is a huge red flag for prospective credit grantors. Some of the very worst credit reports that we see are participants in the CCCS or similar programs.
Myth # 15: It is illegal for creditors to take a negative, accurate listing off my credit report. The law requires that these items remain on the credit report for at least seven (7) years.
This is not true - there is absolutely NO requirement for any item to stay on your credit report. The law limits negative information from appearing longer than the legal seven or ten year maximum. The credit grantor or credit bureau may choose to delete the item whenever they see fit.
About the Author Chris Esposito provides home renovation loans through CM Direct, specifically designed for people who want financing for their home improvement projects. To learn more about credit repair or home renovation loans, visit www.DirectRehabLoans.com, or call (877) 876-3688.
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