The path to credit repair is always full of trials and tribulations, not to say of ignorance and misconceptions. To get a better credit score, you need to fix past financial problems, develop good spending habits and also consider credit score fictions (myths) for an improved credit score.
Credit Myths and truths
There can be misconceptions about managing credit at any age. Knowing the truths can help you manage your credit in a better way.
Truth: One popular myth is that higher salary bumps up credit score. Most of you are unaware that the factors such as sex, income, age, and length of employment are not taken into account when the bureaus evaluate scores.
Truth: A lot of consumers believe that only a credit repair company can get their scores resurrected. However, you are capable of doing the same thing (that a company will do) and that too for free.
Truth: No law demands financial institutions (lenders, banks, etc.) to report all your financial activities to a certain CRA (Credit Reporting Agency). The law just asks them to report any financial transaction (only if they choose to) correctly.
Truth: Surprisingly, credit bureaus are for-profit commercial entities with no government affiliation at all. According to the Comptroller of the Currency, both the CRAs and the entities providing data to them will function under the direct authority of the Federal Trade Commission (FTC) and the Office of the Comptroller of the Currency (OCC). In addition, the Fair Credit Reporting Act (FCRA) clearly states as to how would a CRA permit the consumer to challenge their credit reports. Even the Consumer Financial Protection Bureau (CFPB) has the authority to keep a constant vigil over the day-to-day operations of the CRAs.
Truth: You've checked your credit report. You didn't find any error on your credit report. So, you're quite confident that your credit is good. However, you're forgetting that you've seen only one credit report. You need to check other credit reports as well as they may contain wrong information.
Truth: You can view only one credit report for free through various websites. As far as website like freecreditreport.com is concerned, they charge a fee to give you a glimpse of your credit report. You can only view your credit report at annualcreditreport.com once a year.
Truth: The truth is that checking your own credit report any number of times that you want doesn't do a thing to damage your credit score. An expert from one of the leading credit reporting agencies says that even if you view your credit report each and everyday, it will have no impact on your credit score whatsoever. These are known as soft enquiries in the industry jargon. On the other hand, when a lender pulls your credit score, it is known as hard enquiry and too many of these will ding your credit score.
In case you are shopping around for better rates, going from lender to lender, you might think that the series of hard enquiries against your credit report will damage your score. Taking such situations into consideration, credit reporting agencies usually group multiple hard enquiries into one hard enquiry in case they notice that your credit report has been pulled multiple times within a period of 30 days.
Truth: This is an out and out distortion of facts. The decision to grant or deny a line of credit to an applicant is at the sole discretion of the lender. The credit reporting agencies have no hand in the process. Credit reporting agencies specialize in collecting and analyzing financial data and generating reports which indicate the creditworthiness of an individual.
Credit reporting agencies compile and analyze debt related data impartially and don't make any judgments or take decisions based on the information appearing on your credit report.
Truth: One of the biggest myths about credit reports is that it also includes the individual's credit score as well. The fact is that a credit report lists only the various lines of credit that you have used, both in the past and in the present. The only way you can gain access to your credit score is by paying a fee to FICO. Other than that, you can also get a free copy of your credit score from lenders who have denied you a new line of credit based on your score.
There are other online services through which you can access your credit score for free but the score maintained by such services may not be equivalent to your FICO score. Most lenders depend on the FICO score when they assess an application for a loan although some creditors do use scores from other services as well. It all depends on the type of loan you are applying for and the lender.
Truth: You might think that credit scores are only useful to lenders and you don’t have to worry at all. You might also think that handling your finances responsibly will help you have a great score. However, to achieve a good score, you need to use your credit responsibly. You have to use your credit cards and repay the outstanding balance every month. You should also check your credit reports periodically in order to be sure there are no errors. All these things will help you have a good score and in turn, will help you take out loans at favorable terms and conditions, which in turn, will help you enjoy a better lifestyle.
Truth: It is a myth that checking your credit reports will hurt your score. To know the reality, you need to know that there are 2 types of inquiries, hard inquiry and soft inquiry. The latter or soft inquiries occur when you request for a copy of your credit report in order to check it and hard inquiry happens when a credit card company, a bank or a loan company checks your credit report to decide whether or not you’re a creditworthy person. Soft inquiries have no effect on your credit report but hard inquiries do affect your score though not much.
Credit score myths for young adults (Aged 20 through 40)
As an young adult, your career has just taken flight and you're experiencing a new sense of freedom, precisely, financial freedom. However, be responsible with your finances and find out the facts behind the popular credit score fictions revolving around your age group.
Truth: There are hundreds and thousands of credit scoring models for the lenders to use. These models are usually prepared by credit reporting agencies, independent companies, and even by the lenders themselves. However, FICO score (developed and administered by the Fair isaac Corporation) is the most widely used credit scoring model.
Truth: You can check your credit reports as many times you want without pulling down your score. It doesn’t affect credit score calculation. However, inquiries made by the businesses due to your credit applications affect your credit score negatively.
Truth: Credit report is separately made for every individual. However, certain item mar-t-20s get reflected on both of your credit reports; like, the information regarding joint accounts will show up on your and your spouse’s credit reports.
Truth: You shouldn’t get into knee deep debt to establish a shining credit history and a stellar FICO score. Instead, try to show moderate but responsible use of credit by paying entire credit card bills at every billing cycle and making loan payments on time.
Truth: No, they are not. Credit scores are numeric grades derived on the basis of information (on the credit reports) concerning a consumer's personal debt liabilities, financially-related public records, etc. Credit report contains personal identifying information, too.
Truth: Simply put, employers don’t use or have the access to credit scores so as to screen suitable candidates. However, credit reports may be used by a prospective employer for employment screening purpose.
Truth: It takes long to rectify mistakes on your credit report. As per FTC (Federal Trade Commission), you’ve to include a copy of the disputed credit report (areas of dispute encircled with a red pen) along with copies of other valid documents.
Truth: Creditors have started using social media to find out the preferences of their consumers. A clear understanding of the markets help them to promote their products/services in front of the right audience in a better way.
Truth: You have always taken special care of your credit. You have taken the right steps every time. However, this is not enough to retain a good credit score. Nearly 70 percent of the credit reports contain mistakes. So, your credit report may also have some wrong information in it. If you don't get them rectified soon, then you'll have to pay high interests on loans.
Truth: Marriage or divorce has no direct impact on your credit report. Both parties will still have their separate credit reports. In case you live in a state which has community property laws, the data on credit lines granted after marriage tend to merge automatically and show up on the credit reports of both parties. Moreover, if your spouse co-signs a loan or vice versa, the account will appear on both your credit reports.
Marriage won't render you financially responsible for your spouse's debts but in case of community property states like Arizona, Nevada and Texas, which hold both parties responsible for debts incurred after marriage. Joint debts appear on both parties credit report regardless of any divorce settlement or agreement.
Credit score myths for baby boomers (Aged 49 to 60)
At this matured age, whether or not you have a family, you’ve already experienced most of the harsh realities of life. You know what it takes to be financially independent, not to say of good credit. However, there are some credit score myths that bother the baby boomers, too.
Truth: No, closing old accounts shorten your credit history, which pulls down your score, as the length of your credit history determines 15% of your overall score. Too many open accounts have some negative effect; but, instead of closing accounts, repay what you’ve borrowed.
Truth: No one can legally remove accurate negative information like bankruptcy, lien, foreclosure, etc. before a certain time. For ex. - Chapter 7 Bankruptcy stays on report for 10 years.
Truth: Shopping around for the best mortgage or automobile loan rates (also known as hard inquiries) doesn’t usually lower their score. Such inquiries (like mortgage or car loan) are counted as a single request as long as they occur within 30 to 45 days.
Truth: Credit card offers don’t have any negative effect on your score. However, if you’re applying for a lot of credit or you’ve opened multiple credit accounts within a short span of time, then there are chances you’ll overspend, which can hamper your score.
Truth: When you sign up with a credit counseling company, your credit report will show a statement in relation to each of the account for which you are seeking credit counseling. This statement will be something like "payments made with the help of credit counseling", or "client is undergoing CCCS". Statements like these itself may not lower your score, but then it is considered as derogatory by the lenders as it implies that you are overwhelmed with debt and have mismanaged your finances. In addition, most of the credit counseling companies will make your payments after the due date has passed and this will cause late-payments to get reported on your credit file as well. This in turn will further lower your credit score.
Truth: Your score is yours. It has no relation with that of your tenant. If your tenant’s accounts are included on your report, then it's an error made by the information provider / CRA (Credit Reporting Agency. The way out is disputing with both of them.
Truth: As per the federal law, your credit report must contain information that is fair and 100% correct. Each and every information should be validated upon your request. Previous record shows that around 79% of all credit reports have errors of some kind.
Truth: Negative item mar-t-20s are always harmful for your credit score. However, its effect will depend on the type of the negative item mar-t-20 and other positive listings on your report. It is the lender's discretion to rate your creditworthiness and decide whether or not to grant your loan request.
Truth: Credit reporting is completely a voluntary business in our nation. It has no specific executable minimum time period; if the creditors fail to report credit activities in a fair, accurate and validated manner, the reported data must be removed. The law only sets the maximum permissible time limit. Data providers can remove any information at their own discretion, keeping the specified time limit in mind. Moreover, not all data are reported for 7 years; it can be 2 years or 10 years depending on the negative item mar-t-20.
Truth: Credit rating agencies (Ex. Standard and Poors, Moodys Investors Service, Fitch Ratings, etc.) evaluate and grade financial tools (like mortgage or corporate bonds) and not rate any individual consumer. Whereas, credit reporting agencies (TransUnion, Experian and Equifax) grade the creditworthiness of the consumers individually.
Truth: Both your credit scores may remain entangled, even after a divorce. For instance, if both of you use a same credit card, then both of you are equally liable to repay the balance. So, it’s better to close all the joint accounts beforehand.
Credit score myths for retirees (Aged 60 and beyond)
According to latest market reports, an increasing number of retirees like you are still severely indebted. This is wreaking havoc on their retired life, especially on their savings and credit. Moreover, you may get bombarded with several credit score misconceptions when thinking of using any particular debt relief option. Finally, senior citizens (retirees) too often fall prey to some of these credit score misconceptions.
Truth: Any unpaid medical debt shows up on credit report (especially if they’re sent to collections), which have a negative impact on FICO score. However, the extent of the impact is determined on the basis of the collected information, along with different other information shown on your report. Moreover, smaller amount of collection accounts (actual debt amount being lower than $100) is usually ignored by the score.
Truth: Both foreclosure and short sale are equally harmful for your credit, as they are regarded as loan primaries - a factor the FICO scoring model uses to predict your creditworthiness. However, if you owe a deficiency balance amount, and it is reported, your credit score will suffer more as compared to a short sale with no deficiency balance at all.
Truth: As per the law, Attorney Generals (AGs) can file a lawsuit against any credit repair agency under the federal Fair Credit Reporting Act. Many consumers reportedly lodge complaints with the FTC or their state attorney generals to help defend themselves against the three leading credit reporting agencies - Experian, Equifax and TransUnion.
Truth: Credit scores will appreciate you for having no debt at all. A number of metrics are used in various credit scoring systems that penalize you for owing outstanding loan balances. Basically, using your credit card up to its credit limit, having multiple accounts with high outstanding balances, and having a number of delinquencies and the likes, hurt credit scores.
Truth: Debt settlement does impact your credit scores negatively. However, negotiating for a settlement won’t ding your credit score, but having your debts settled successfully will. Moreover, missing monthly payments will also pull down your credit score, as often asked by the debt settlement companies.
Truth: Your credit score will start improving after about 1 year from the date of complete bankruptcy discharge. This is very likely to happen if you continue to make monthly payments on time. Moreover, 7-10 years later, you’ll be able to gain complete control over your credit score and lenders will once again be willing to grant you fresh credit at suitable terms and conditions.
Truth: You will have to repay your debts to establish that you are capable of managing multiple lines of credit efficiently. Alternatively, not borrowing any loan will make it difficult for you to obtain a credit card or any other type of credit. Hence, if you start slow but are responsible with your purchases and pay back your balances on time, you can build a pretty stellar credit score.