Fact vs. Fiction of Credit

This article states common credit beliefs heard everyday around the real estate industry and from different clients and consumers we have worked with before. Here we attempt to shed a little light on the truths and myths of credit so hopefully you are able to benefit from understanding the ins and outs of how credit works.

Always remember that one of hte ways to keep tabs and keep your credit under control is to check up on your own credit. Though be careful where you request a copy of your credit report. Many websites today advertise "free" credit reports and instead subscribe you to a myriad of advertisements and monthly services in exchange. Even the three official credit bureaus mentioned above are guilty of attempting to earn a few etxra bucks from consumers in such a way.

You, as a consumer, are entitlted to a free copy of your credit report every year so don't forget to request your annual free credit report. The best place to order your free credit report you ask? The official Congressionally-mandated site. In the mean time, the true and false statements below are categorized for your convenience in fact and fiction.

FACT

"There are three credit reporting bureaus and each bureau tracks my credit history independently of each other."

There are three separate credit bureaus -- TransUnion, Experian, and Equifax, all of which track and report your credit history on their own. This means that each credit bureau will have its own credit score for you and each bureau will record its own credit history of you. There are a few major reasons why each bureau has different credit scores and reflects different histories of you :

Not all accounts appear on every credit bureau. Creditors and lenders work independently of one another. In order for their accounts to reflect on each bureau's credit history, each financial organization must report to each bureau on their own, which usually does not happen.

The number of inquiries. Some mortgage banks, brokers, creditors, or loan makers, will request your credit report only from one or two bureaus. This means that only those bureaus will be negatively affected by the inquiry.

*Friendly Tip: Each bureau is required to provide every individual with a free credit report each year upon request. It is best to request a report from all three bureaus to make sure everything is the same and there are no mistakes. With an annual credit report being free, there is no reason to delay finding out what your credit history holds! Visit Annual Credit Report, the official credit report site truly providing a free credit report every year with no strings attached.*

"Shopping for a loan within 30 days of each other won't affect my score."

In early 2003 Congress realized that consumers need protection when it comes to having the right to shop around when obtaining loans, cars, etc. So credit laws changed -- as long as the same kind of inquiry is being made on your credit within 30 days of each other, it will only affect your credit score once.

"The credit card offers I receive in the mail do not affect my credit score negatively."

Credit card offers are only what they sound like -- offers. Though the lenders offer you credit cards they do not necessarily pull your credit in order to preapprove you for them. Instead they may use other methods to find out about your credit worthiness such as investigation into your standing with other credit card companies. The only way credit card offers can hurt your credit is in the case that you accept the credit card or begin charging on the credit card. Both of which will require the creditor to pull a credit report to ensure accurate information.

"Discharged or paid off bankruptcies are removed from my credit report within 7 to 10 years."

Even after you pay off your collections, liens, and bankruptcy judgments, credit reports will continue to reflect the debt for up to ten years. The purpose of this is to allow lenders and creditors to view your credit history even after you make the payments to pay them off. Without showing a history of your borrowing and payment habits, a credit history's purpose disappears.

"Checking my own credit report won't lower my score."

The action of checking your own credit is considered a soft inquiry, which does not affect your credit score at all. Consumers have the right to check up and protect their credit reflections without having to worry about any negative consequence from doing the right thing. The only time inquiries affect the credit report negatively is if and when third parties, such as lenders and creditors, inquire into your credit which may affect your score anywhere from a few points to 60 points.

"Check cards do not help my credit report or my credit score."

Check cards (aka debit cards) are merely a plastic method of accessing your checking account. They do not work like credit cards, where you basically borrow money from creditors promising to pay them back. Instead you are withdrawing money directly from your bank account. Due to the fact that you are not truly borrowing from the funds, the activity on your check card will not reflect on your credit report and therefore has no effect, good or bad, on your credit.

FICTION

"A great credit score happens automatically as long as I make my payments on time."

As you already know making timely payments is extremely important and a great start to obtaining great credit. However it is not the only factor considered when your credit score is calculated. Prompt payments only make up about 30-35% of the credit scoring. Other major factors include: account balances, the length of time accounts have been open. Creditors and lenders alike like to see that you are responsible with the use of your credit. So even if you are responsible enough to make prompt payments, overusing credit still leaves a negative mark on your credit because it shows overextending finances. Learn more about what affects credit scores in our article: "What Affects Your Credit Score."

"Credit repair agencies can fix my credit score and history overnight."

Beware of organizations and agencies that claim they can fix your credit overnight. No agency can perform this miracle, though we may all wish there were one in existence. Credit repair agencies essentially offer credit repair services but often use illegal, unethical, or unauthorized tactics in the attempt to clear your credit report's negative history. Also remember that credit repairing agencies and credit bureaus work independently of each other. So do not trust any credit repairing agency that claims miracles to your credit instantly. If you are considering using their services take a moment to read the Federal Trade Commission's (FTC) guidelines.

"Credit counseling will destroy my credit score."

Credit counseling was established for your benefit but ultimately reflects negatively on your credit. The goal behind credit counseling is to help consumers learn to allocate their funds towards the repayment of debt and to manage their debts responsibly for the benefit of their credit. So clearly if it is not actually directly detrimental to your credit score. However, lenders and creditors have a unanimous opinion that the appearance of credit counseling on a borrower's credit shows that there are serious problems with the borrower's ability to manage finances. Credit counseling, in the eyes of creditors and lenders, indirectly increases the chance of an individual ending up unable to pay back debts and ultimately foreclosing on property.

"Paying off a collection always raises my credit score."

The action of paying off your collections, debts, and bankruptcy judgments is always a good thing. However, a credit report reflects your credit history not a snapshot in time. So even though you have paid off your judgment or collection, an inquiry on your credit report will still reflect a previous judgment or collection. Thouh you cannot change the past, remember you can always have a great influence on the future.

Nowadays, we know that many creditors and collection agencies promise that once you pay off the debt owed they will remove the payment and collection history from your credit report. Beware of these agencies because they are lying. Unless they are doing something illegally, there is no way of removing late payments and collections from your credit report unless the actual collection is erroneous. In which case the collection and/or late payment can be disputed and most likely will be removed with supporting evidence from the creditor of their mistake.

"Closing credit cards will improve my credit score."

This is one of the biggest myths in the industry. Many misguided brokers and banks will advise their clients to close unused credit cards due to an excess of plastic. Credit is based on several things, one of them being the ratio of your debt in comparison to your allowable credit balances. By closing credit cards you are essentially erasing your available credit and therefore increasing the ratio between your debt and remaining credit. This only serves to negatively affect your credit. It is not the fact of having multiple credit cards that negatively affects your credit score, it is the abuse, the overextension, and the inability to repay too much credit build up that negatively affects your score.

*Friendly Tip: To get a better idea of how this aspect works, read our article: "What Affects Your Credit Score."*

"It's best if I pay everything in cash and never own a credit card or apply for any loans."

Unfortunately credit along with credit cards are double-edged swords. Having credit runs the risk of overextending yourself and becoming overwhelmed with too much debt. Having no credit results in having no credit history or credit score. Credit scores are based off of an individual's borrowing and repaying habits. So without actually having any credit, you cannot have a score or a history either.

Without some type of stable history or score, no lender or creditor will be able to lend to you since they have no evidence of your financial responsibility. Ideally it is best to have at least three credit cards, maintaining a balance of less than 30% of the maximum balance allowed. If you fear credit cards or the concept of credit in general, try thinking about it this way: You will eventually need credit. Unless you never plan on buying anything online and unless you plan on buying your house and cars in cash, you will need credit. Credit use does not hurt you, it is credit abuse that may. But don't let that possibility prevent you from obtaining the credit necessary to establish your credit history and score.

*Friendly Tip: Keep in mind that installment loans including student loans and mortgages also count towards credit. If you have a credit card that you are not using, think twice before canceling your account -- having at least three credit cards is a good thing.*

"A higher salary or a more 'reputable' job can raise my credit score and increase the possibilities of getting approved for a loan."

No matter howmuch you earn, how much money you win in the lottery, or how much money you inherit from Grandpa, credit scores and credit bureaus do not take into account an individual's income or net worth. What does matter is you put the money you have to good use by making sure you keep your debts paid in full and under control. If you cannot pay off debts in full, making on time installments or monthly payments will still help build your credit score history.

"When I get married, our scores merge. When I get divorced, our scores separate."

Scores never "merge" which could be a good or bad thing. Your credit history and credit score always depends on your own borrowing and payment habits. Only when your credit cards or loans are held jointly does you and your spouse's credit information become affected by being married. In these cases both of you will be held liable for payments and payment history for this particular credit and therefore it will reflect on both credit reports. No matter what happens you will still have separate credit reports to refer to in the end.

Unfortunately marriages may bring you together when it comes to borrowing but divorces do not separate your borrowing and payment habits on joint cards. Generally part of the divorce process will include determining who pays which cards and debts. However no matter who pays the debt, the credit contract was still signed by both you and your spouse; so a late payment will affect both of your credit histories and credit scores. The only way to prevent this is to either cancel the credit or contact the creditor/lender and attempt to have yourself removed from the credit card.