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Common Credit Myths
It is in my best interest to not have any open credit at all and not have any outstanding balances to my creditors.
False. Open credit helps establish your payment history with creditors and improve your credit scores. By not having any open credit, this can hurt you as much as having bad credit. In today’s lending environment, banks want to see that you can make payments on time to your creditors. If you do not have any open accounts, then you will either not have credit scores or your credit scores will remain stagnant without accounts to rate them against.
I should payoff all of my old past due accounts, collections/judgments to increase my credit scores.
False. This is the most common misperception out there and is entirely false. If you pay a collection, judgment or past due account less than one year old, it possibly might help your credit scores. By paying off old bad debt greater than one year old, you will actually hurt your credit scores rather than help them because credit agencies such as Equifax, Transunion and TRW use the date of last activity. When you pay an old debt, the impact is the credit agencies will rate any recent activity as having another collection, judgment or past account filed against you. It brings down your credit scores, it does not help raise them.
Any inquiries into my credit will pull down my credit scores.
False. The type of inquiries that have an impact on your credit scores are if you go out and apply for multiple accounts such as a credit cards, car loan and store accounts. And if there is a high frequency in a short period of time, these will definitely have an impact on your credit scores. If you apply for a mortgage loan though, the credit agencies only rate the first pull into your credit as an inquiry. You then have 30 days to go out and shop for a lender as a mortgage inquiry is rated differently and will not pull down your credit scores if multiple inquiries are made.
I should close my credit card accounts to raise my credit scores.
False. By closing credit card accounts, credit scores can actually drop signficantly. When you close a credit card with a balance, your total available credit and credit limit are reported as $0. Since you still have a balance on that credit card with no credit limit, it looks like you are maxed out. A maxed out credit card, or one that appears to be maxed out can have a very negative impact on your credit score since your level of credit card debt, including your credit usage to available credit ratio is 30% of your credit score.
The credit scores I see on my consumer credit report are the same as a mortgage credit report.
False. The scores are calculated very differently between a consumer credit report and mortgage credit report. Many times the scores on a mortgage credit report are lower than the consumer credit report.
So, you are probably asking yourself what can be done to improve your credit scores. Of course, paying everything on time is a must but there is one other thing that can be done. Revolving credit (credit cards) are key to improving credit scores so keep at least one credit card with a balance on it and pay the minimum monthly amount. I always tell customers that it is not about going back in time trying to fix the bad stuff, it is about moving forward and re-establishing credit for the future.
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