Four Damaging Myths About Your Credit Score

Banish these myths from the way you handle your credit! Your score will be as good as it can be when you know the truth about how these actions affect your credit score.

Damaging Myth Number One: Closing inactive accounts will raise your score.

This is a widely held belief, but it's false. Closing accounts, whether or not they have zero balances, whether or not they're inactive, will often lower your scores. Why? Because part of your credit score is based on the ratio of your credit card debt to your total available credit. If you close a zero-balance account with significant available credit, this ratio gets smaller. It's as simple as that.

On the other hand, you can also have too much of a good thing (too much available credit compared to your ability to pay). If you're concerned that this may be true in your case, then you can close zero-balance accounts that you don't need. If you plan to close more than one zero-balance account, wait a few months in between. Each closing will initially affect your score adversely, and it can take months for the scores to be adjusted upward.

Damaging Myth Number Two: It doesn't matter what balance is on each card; it's the total that counts.

Again, this is untrue. Another part of your score is calculated by looking at the debt to available credit ratio on each card individually. Ideally, keep this under 30% on every one of your cards. For example, if your credit line on a card is $2500, keep the balance below $750.

Pay your debt down instead of moving it around to other revolving accounts. Moving it around (for instance, moving balances to zero or low interest credit cards) can lower your scores. With all the offers for low initial rates, many consumers are moving their credit card balances over and over again, trying to keep their accounts at the lower rates. If you're moving balances among accounts that you already have open, and if you can do it without going over 30% on each account, then this is okay. But if it means applying for a new account each time, don't do it. Each application will lower your score.

Damaging Myth Number Three: More accounts and greater available credit always means a higher score.

Not true. Don't open new accounts you don't need trying to increase your available credit. It can backfire. You need only four open and active accounts to establish great credit scores. Apply for credit only as you truly need it.

Many folks fall for department store promotions. The offer to get 10 or 20% off if you open an account may look like a great deal, but the activity can be detrimental to your credit scores. Don't open accounts thinking it will raise your score, as it may not help at all. Have credit cards, but use them wisely. It is actually viewed that someone that has a good history of responsible credit use is a lower risk than someone with no credit cards at all. For the best score, ideally you should have a mix of installment credit (cars, furniture, etc) along with credit cards and mortgages.

Damaging Myth Number Four: Your credit reports are complete and accurate, even if you never make sure of it.

If you have ever had a collection account, judgment or tax lien, don't assume that the creditor, collection agency or taxing body will report the resolution to all three bureaus. That goes for erroneous reporting you find on your report too. Don't assume that because you paid off a collection, judgment, or lien that it is immediately reported to the bureaus. Even when you close an account, it is often not efficiently reported as such to all bureaus. It is not uncommon to see such activity reported to just one bureau, even when the adverse account was being reported on your credit report by two or all three bureaus.

Unfortunately, agencies and creditors are quick to report you when you owe them money or have made a recent mistake, but they can be very slow to report the final resolution to that account when you have paid them. This problem is magnified when there has been a bankruptcy. Accounts that have been involved in a bankruptcy may have been moved between the creditors and various collection agencies long before the filing for bankruptcy protection. The creditor is reporting the account as delinquent and is likely reported it as a charge-off.

But the creditor has also sold the account to a collection agency, hoping to get a small percentage of their loss back if the agency can collect anything. This goes for credit cards, department store accounts and even installment loans like auto loans. The account is sold back and forth between creditors and agencies.

The problem is that after one files for bankruptcy protection, and after the time has passed that it takes to successfully bankrupt the debts, the accounts may be sold multiple times. In addition, it is not uncommon to see an account go to collection after it has been discharged in a bankruptcy. You are thinking that you have a fresh start to rebuilding your credit after the bankruptcy, yet there may be new collection accounts dated after the discharge which has a huge impact on your already damaged credit scores.

What's the remedy? Watch your credit reports like a hawk! No one else cares nearly as much as you do about making sure they're accurate. You have to follow up with each individual bureau and supply them with copies of your discharge and lists of creditors to insure that everything is reflected accurately on your overall credit report. It can take years to see a rise in your credit scores if you don't follow through with this. It is your responsibility to watch any such activity and make sure that all three bureaus have the most recent and accurate information possible. You can write and/or file online disputes with each individual bureau and supply copies of paid receipts and any correspondence you may have to insure that your record is recent and correct.

Resources

You have the right to one free copy of your credit report per year from each of the big three credit reporting agencies. They don't have to be requested at the same time. For more information go to AnnualCreditReport.com.

These are the big three credit reporting agencies:

Experian
NCAC
PO Box 9556
Allen TX 75013
888-397-3742
http://www.experian.com/

TransUnion
Customer Disclosure Center
Trans Union Consumer Relations
PO Box 2000
Chester, PA 19022-2000
800-888-4213
http://www.transunion.com/

Equifax Information Services
P O BOX 740256
Atlanta, GA 30374
800-997-2493
http://www.equifax.com/