A rising risk of identity theft online requires additional precautions to protect your personal information.
Whether you’re trying to pay off bills or looking for a new home, your ability to access credit is critical. Here are several common myths involving credit.
Myth No. 1: Bad credit will haunt me forever!
That is not true. The bad news is that paid collections, information on paid bank accounts, civil judgments and tax liens remain on your credit report for seven years. The good news is once you pay a collection, tax lien or civil judgment, the effect on your credit score is reduced (weighted less) each month.
We recommend that you never pay off a delinquent account right away. Once you bring a delinquent account current, keep it open and current for at least six months before paying it off.
Conversely, if you have paid off installment or mortgage loans, the positive effect of paying those accounts off is also less each month after it’s paid. Due to a quirk in the FICO (Fair Isaac) scoring system, if you have no open accounts in the last six months, FICO will not score your credit report.
Myth No. 2: Bankruptcy is a “fresh start” for troubled credit.
False. Bankruptcies are reported for 10 years. Once the bankruptcy has been discharged, the effect on your score is also reduced a little each month. A bankruptcy can lower your score by as much as 100 points, if that is the only negative data on the report. Bankruptcy can sometimes cost a consumer more in higher interest rates, more down payments, higher rent payments and higher insurance premiums than what was saved by filing bankruptcy.
Myth No. 3: New inquiries will reduce my credit score.
That is both true and false. A recent email from myFico.com said, “If the inquiries are not listed as being mortgage, auto or student loan, then each inquiry will individually impact the score.”
FICO says that inquiries count for 10 percent of your credit score, and that only “consumer-initiated inquiries for new credit” will affect your score. FICO does consider “rate shopping” in its scoring and says that multiple inquiries for auto or mortgage loans in the last 30 days do not count against your score. The problem occurs when the creditor submits an inquiry and does not tell the credit bureau that it is for an auto or mortgage loan.
Many lenders distinguish between mortgage and consumer loans, but fail to input the correct purpose code (auto, personal, secured, unsecured, home equity, second mortgage, or credit card). We recommend asking your lender when you apply, “Are you telling the credit bureau the exact purpose of the inquiry?” If they don’t know, won’t answer or admit they do not, go to another lender! Many lenders think they are entering a purpose code when they click “consumer” or “mortgage,” but that does not tell the credit bureau the correct purpose of the inquiry, and your score could be adversely affected.
Inquiries for employment, account review and refreshed mortgage credit reports do not count against your score, providing the creditor inputted the correct purpose code. In addition, inquiries from annualcreditreport.com do not count against your score. We recommend going to that site every four months and pulling one credit report.
Myth No. 4: Too much credit will hurt my score.
I hate to sound like an old politician, but it depends on your definition of “too much.” You don’t want to have too much available credit, nor do you want too little. You never want to go over 40 percent of your available credit on any one card, nor over 40 percent on all your revolving credit lines combined.
I like to refer to the old “Bell curve” in business statistics: you don’t want to be at either side of the curve. Actually, FICO looks at and assigns 10 percent of your score to a “healthy mix” of credit. Generally, a person with a credit card and an installment loan would have a higher score then someone with only a credit card or two, or with only an installment loan. If you throw in a mortgage loan, the score goes up even more.
Myth No. 5: My age affects my credit score.
Well, not directly. FICO says 15 percent of your score is based on how long you have had credit. It looks at both how long you’ve had credit, and how long each account has been opened.
If you cancel and close all your unused credit cards, you could adversely affect your score, as you would be looked at just like a 20-year-old. We recommend not closing your oldest account(s).
Also, do not close recently opened accounts. If you took advantage of the 10- and 15-percent discounts you received for opening accounts last December, go ahead and pay them off, but keep them open for at least a year.
Myth No. 6: There are only three credit bureaus.
False. The term “consumer reporting agency” means “any person which, for monetary fees, dues or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.”
There are three national repositories of consumer credit information: TransUnion, Experian and Equifax. There is also a fourth, CBC Inovus, trying to gain recognition. There are many other companies, called “resellers,” that buy data from the three major national bureaus. The term “reseller” means a consumer reporting agency that:
- “assembles and merges information contained in the database of another consumer reporting agency or multiple consumer reporting agencies concerning any consumer for purposes of furnishing such information to any third party, to the extent of such activities; and
- does not maintain a database of the assembled or merged information from which new consumer reports are produced.”
Resellers are responsible for maintaining and verifying the information they sell to other creditors and consumers. Resellers are able to dispute directly with the credit bureaus any incorrect information in reports they have sold.
There are also credit bureaus for checking account information, tenant screening and medical information, to name a few. Not all banks and credit unions report to all three, and most do not pull from all three. When applying for a loan, ask to whom they report. We recommend Experian. Since 35 percent of your score is based on how you pay your bills, most people want their credit reported to the bureaus.
Myth No. 7: Everyone uses credit scores.
False. Many landlords, a few banks and some credit unions do not request a score when they pull your credit report. Those institutions use the credit report only to approve or reject the credit request. (If you are rejected because of information in the credit report, the creditor must provide you with the name, address and toll-free number of the credit bureau they used.)
However, many lenders, landlords and insurance companies use the credit score to determine the rate and terms they will offer customers.
To make matters even more confusing, there are many types of scores. National lenders and Fannie Mae and Freddie Mac accept Experian FICO V2, TransUnion FICO V4 Classic and Equifax Beacon 5. (These are the ones we recommend.) These scores range from 300 to 850, with 850 being the top. Many car dealers use an “auto model” score. Since these often go as high as 900 or 990, the customers’ scores look better.
When you request your free credit report from annualcreditreport. com, they will try to sell you something called VantageScore. This starts at 501 and goes to 990. This credit score cannot be compared to what banks, credit unions and landlords use. Insurance companies use an insurance score that, again, is different from what the banks and credit unions use.
In Summary
Make sure your lender is pulling your credit report correctly—and only when you are requesting new credit. If you are buying a car, the dealer may send your information to several banks and credit unions—who may not pull your report correctly.
Don’t try to open several new accounts in a short period of time.
Don’t close all of your older accounts thinking that will raise your score.
If you have poor credit, it is possible to raise your score. Many lenders will work with you, if you are truthful and willing to work with them.
Finally, check your credit every four months at annualcreditreport. com, or call (877) 322-8228. Get an Experian report one month, wait four months and get a TransUnion report, then wait four more months and get an Equifax report. That way, you are checking your credit report all year long for free. iBi
