Credit-Scoring Myth #1: If I avoid credit, I’ll have a great score.
Fact: Though shunning credit cards and loans might sound like a good idea, going down this path will make your life harder, not easier. Credit scoring systems want to see that you can responsibly handle many different types of credit before they award you a good credit score. If you don’t accumulate a proven track record, you won’t get a good score. And I always say that no credit score is as bad as a poor credit score. Credit companies will be unlikely to advance you a loan, and a bad credit score may prevent you from getting a job or landing an apartment.
Credit-Scoring Myth #2: As soon as I shut down some of my credit card accounts, my score will go up.
Fact: In this case, rather than causing your score to rise, your credit score may drop sharply. Fifteen percent of your credit score is affected by the length of time you’ve had credit. To reach this figure, credit-scoring bureaus take the average age of all of your credit accounts. Canceling several of them could cause your credit score to plummet. A better bet is to pay off the balances on your credit cards.
Credit-Scoring Myth #3: I must retain a balance or else I won’t have a good credit score.
Fact: Unfortunately, this myth has caused many consumers to spend money for no other reason than to preserve a balance on their credit cards, which actually has no effect on a credit score. Credit-scoring bureaus value activity on cards, but they do not add any value to keeping a balance. If you retain a balance, you will accrue interest on the balance, and your utilization rate might increase about 30 percent.
Credit-Scoring Myth #4: I’ve just experienced a bankruptcy, foreclosure, or tax lien and had bills turned over for collection. There’s no way I can get credit.
Fact: The facts of bankruptcy, foreclosure, tax lien, or collections notice on your credit report will have a very negative effect on your credit score, but if you take the proper steps to learn how to improve your credit score after a financial disaster, your score could increase to 720 in two years. As well, some lenders cater to people with bad credit, although you’ll probably have to deal with a high interest rate.
Credit-Scoring Myth #5: As long as I pay my credit card bill in full and on time each month, my credit will be perfect.
Fact: This is a popular myth, but paying your bills on time is only part of the story. You’ll have to add a diverse mix of credit and show that you can responsibly manage several active accounts to fully maximize your credit score.
Credit-Scoring Myth #6: My credit score will increase by paying any account in collection.
Fact: This is not a sure thing. More often than not, your credit score will decrease if you pay a collections account, especially since it will extend the time the account stays on your credit report.
If you want to learn more about the credit-scoring myths, be sure to attend the next teleseminar!