A nice young couple goes to Honda to purchase a shiny new CRV. They meet with the salesperson, take a test drive, and find the perfect vehicle for their growing family! The meeting with the sales manager goes great, and he works out a price that they can afford, and they are very excited to be leaving today with their brand-new SUV! Just one more step. They head down the hall to meet with the financing manager to finalize the paperwork. April Fools! They find out that their payment is going to be $60.00 more per month, because they fall into a Tier 3 credit zone. How could this be? They make all their payments on time, and they cannot understand why their high credit balances have impacted their credit score in such a detrimental way. Dejected, they decide to put off purchasing a new car and leave the car dealership disappointed.
There are many myths and misconceptions surrounding credit scores, and sorting out the difference between fact and fiction can impact our finances, and our lives in many ways. In fact, our credit score or FICO score has become increasingly important.
Today, credit scores influence more than our ability to qualify for a mortgage. Bad credit can influence the options available to rent a house or office space, opportunities to purchase or lease a car, impact insurance premiums, and even the ability to purchase a cellphone or affect a person’s ability to get a job!
With the rising impact of credit scores, understanding the rules can help us most effectively navigate the “credit maze.” Below are 11 myths about credit that need to be “busted”!
Myth No. 1: Income and employment affect your credit score … FALSE. Income and employment do not affect your credit score. Since 1990, income is not reported on a credit report and only affects your credit score if low income or unemployment cause you to miss or make late payments.
Myth No. 2: Your address can affect your credit score … FALSE. The neighborhood you live in, the price of your home, and the frequency of moves does not affect your credit score. The size of the debt on your real estate and the amount of your mortgage are the only factors that affect your score.
Myth No. 3: Your age can affect your credit score … FALSE. Age does not affect your credit score, only your payment history can affect your credit score.
Myth No. 4: Credit scores are updated only once a month … FALSE. Credit scores are updated in real time, not just once a month.
Myth No. 5: Credit laws differ from state to state … TRUE and FALSE. All credit repair companies in all 50 states are required to comply with the Credit Repair Organization Act (CROA), but there are many states that have minor requirements in addition to what the federal law requires.
Myth No. 6: Closing old credit accounts can help your credit … FALSE. This is probably one of the biggest credit mistakes that consumers make. Closing credit card accounts can actually hurt your credit score almost as badly as missing a payment because it can lower your credit used versus credit available ratio.
Myth No. 7: I can repair my own credit … TRUE. The best way for consumers to repair their own credit is to identify the inaccurate items and dispute them with the credit bureaus. Credit bureaus have 30 days to respond to a dispute letter once they receive it from a consumer.
Myth No. 8: Negative amortization does not affect my credit score … False. Owing more money than the original amount borrowed on a loan is considered a negative event to the credit score. If possible, it is better to pay down the balance on any negative amortization loans if you owe more than the original loan amount.
Myth No. 9 There is no way to clean up my credit after identity theft … FALSE. The law makes it easy to clean up your credit if you are an identity theft victim. There are affidavits that can be added to the dispute so that the identity theft related items can be deleted quickly and effectively.
Myth No. 10: There is no difference between a late credit card payment and a late mortgage payment … FALSE. A late mortgage or car payment (installment loan) is viewed as much more damaging than a late credit card payment (revolving debt).
Myth No. 11: Once a payment is late, the amount of time doesn’t matter … FALSE. A payment that is 30 days late is viewed as a less risky event than a payment that is 120 days late. Because your score is based upon the perceived amount of risk, the later the payment, the more it negatively affects your score.
The concept of the credit score is not new, yet it is only in recent years that it has taken on such a great importance. There are many routes for people to achieve their financial goals. The credit score will often determine which routes may be available. Everyone is entitled to one free credit report each year, which can be obtained through www.AnnualCreditReport.com, the Federal Trade Commission’s only authorized site. For a slight fee, the site will also show the FICO score. I encourage my clients to take the time each year to review their report from all three of the major credit bureaus. They can look for errors that need correcting or ways to improve their score based upon the guidance above. If they need further assistance, they can seek the assistance of a professional. w