In the world of credit scoring, there are a wide array of misconceptions and half truths that have been disseminated amongst the general public that contribute to the haze through which many people view their own financial histories. Although it is beyond the scope of a single article to attempt to clarify every misguided belief associated with the credit industry, here are ten of the most common ones with explanations as to why they are not valid:
1. Paying off my collections will raise my credit score.
Answer: Although paying off any debt can raise your score by the merit of lowering your total outstanding obligation, the operative word in the scenario is still “collection.” In fact, even if you pay a collection the moment you find out about it, it could actually lower your score if once they collect the payment, the account reports as a paid collection when it was not there before. In general, it always better to do business with the original creditor to whom the bill was owed as opposed to a third party collection agency.
2. I should close credit cards after they are paid.
Answer: Absolutely not! Having that credit available for your balance to limit ration on the calculation of your credit score can be a boon to your score. As dichotomous as it sounds, the scoring models want you to have zero balances, but still have activity on your revolving accounts. Therefore, any open accounts you have at a zero balance do nothing but help as long as you have at least one credit card you use every now and then.
3. Once a collection or charge off is paid, it must be deleted.
Answer: The only time a non-public record account has to be deleted, regardless of the balance, is after seven years have passed since the original date of delinquency. That date is determined by the first time an account goes thirty days delinquent with the first company that owns it.
4. Anybody can do credit repair
Answer: From a completely objective perspective, anyone can do virtually anything they want when it comes to their own well being. You can file your own divorce or bankruptcy, invest your own money, and perform your own tracheotomy. The real question is “Should you do any of these things yourself?” The most educated answer is a qualified “no.” The best estimates are that a typical credit restoration, education, and repair process provided by a registered, legitimate company would take the average consumer 140 hours to organize, research, and compose on their own time. Even if an individual had that kind of time to spare, most individuals simply won’t, because of other situations that arise, put the kind of concentrated effort towards the endeavor that a professional would
5. The credit bureaus are on your side
Answer: The credit bureaus are only on your side if you are a shareholder, period. Like any other capitalist venture, the charter of a bureau, which is a privately help company, dictates that the primary goal of the company is to make money for the owners. There is no malice in this, only indifference. They develop policies that are in the best interests of a healthy profit margin, not in the best interests of a single person in a unique situation. This, of course, is why the credit bureaus are so vehemently against the idea of credit repair companies. It is not because of their undying devotion to the American public, but because of their own self serving interest in slashing the bottom line, as well as their belief that professionals will consume more of their resources than the general population.
6. Major negatives items ie. Bankruptcies, tax liens, and judgments cannot be removed from a report.
Answer: All items, regardless of the perceived impact they have on a report, must be validated by the entity that initiated them within 30 calendar days if they are challenged by the consumer about whom they are reported. Therefore, if that reporting entity does not respond to a request for re-investigation, any item could be deleted if it is inaccurate or unverifiable. Also, there is a major propensity for these types of items to report inaccurately, and sometimes, by addressing them with such legal documents as bankruptcy schedules to confirm included accounts, release of lien documents with ten year release agreements, and notices of non- suits, these items can be made to affect the score in a much less significant manner.
7. All credit scoring models are the same.
Answer: There are hundreds of scoring models in use at any time that, when applied to identical credit reports, can produce wildly different results. For example, two scoring models used by the Experian corporation, the Vantage score and the Plus Score, would produce a 660 and an 820, approximately, on the same credit report. Also, the Plus score considers around 1/4th the number of factors when establishing a credit score as the Vantage score. Most score providers will disclose the range of scores on their reports, none the less, it is difficult to compare two scores, even when the range is known, that are using such a disparate set of statistics to establish their parameters.
8. I can fix my credit just by paying my accounts on time for a couple months.
Answer: There is no doubt that paying bills on time does nothing but help your score, but can that alone really boost a score in a short amount of time? No, it can’t. The bureaus talk about having patience with the scoring models and your credit history, but there are certainly situations that arise when all patience does in put you in a bigger financial bind. In those situations, the only viable option is often to seek the guidance of a professional who can help you manage your individual credit situation.
9. All credit inquiries in a 14 day time frame count as one.
Answer: Not by a long shot! In theory, all credit inquiries within a thirty day time frame for any not revolving account should count as a single inquiry. However, if the lenders pull the accounts using a different type code, such as “installment loan,” “Auto loan,” “permissible purpose,” and “undisclosed” for a request for auto financing, each of those will count as separate inquiries, despite the fact that they were all initiated for the same transaction. Also, any credit card requests, even if they are from the same bank on the same day, will count as separate inquiries. For example, a Mastercard, Guitar Center Charge account, and Best Buy Charge account would all show up as HSBC, but would also be separate inquires.
10. In order to have perfect credit, all I have to do is pay on all my loans and credit cards on time.
Answer: If only it were that simple. There is a complex web of variables that go into the calculation of any score. They include the mix of credit and individual has, meaning does a person have both revolving and installment accounts. The ration of balances to limits on open lines of credit also has a large impact. on average, for each ten percent increase in the percentage of credit used, a consumer’s credit score decreases by approximately eight points. So all other things being equal, two consumers who have two credit cards each with 1,000 dollars of total limit would have scores differing by up to 90 points based on one having 900 dollars of balance versus another one with no balance. It may also seem at odds with the last statement, but it can also hurt your score to have no recent activity on any credit cards, even if the cards are open. This means that you are rewarded for using your credit cards, but not for carrying a balance, not even a small one. And, to the author’s chagrin, this is but a scratch on the surface of the multitude of factors that influence a score.
11. One late payment won’t hurt me that bad.
Answer: According to Experian’s National Score Index, based upon their plus scoring model, a single late payment to an automotive account dropped credit scores an average of 98 points. Moving a score between 682 and 583 can be the difference between a 6.25 percent mortgage and a mortgage at 12 percent. Although that may seem excessive, it is none the less the facts behind the models that are in place.
