Credit has its fair share of myths, legends and misinformation. Pile on top the proprietary nature of credit scores, the formulas for which are closely guarded secrets, and navigating the credit waters becomes even more confusing.
Time to dispel some common myths about credit reports, credit scores and credit cards:
1. Pulling your credit report will hurt your credit score.
When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will NOT affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score. (Learn more about credit inquiries.)
2. Your income is factored into your credit score.
Your salary has nothing to do with your credit report and credit score. You may make a solid living, but that doesn’t necessarily mean you have good credit.
3. Closing a credit card account will help your credit score.
When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (total of all balances) compared to how much credit is available to you (total of all credit limits). When you close an account, you’re lowering the amount of credit that’s available to you, which may increase your credit utilization percentage. A higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk.
4. There’s only one credit score that all creditors and lenders use to determine your credit-worthiness.
The truth is there are a lot of credit scores out there. And on top of the different credit scores that are available, there are different credit reports on which a credit score can be based.
5. If you pay all your bills on time, there’s no need to check your credit report.
It’s important to check your credit report regularly no matter what your situation to make sure the information on your credit report is accurate. Mistakes are made, inaccurate information is reported and if you’re not on top of it, your credit score may suffer.
Check your credit at least every six months at free websites like Quizzle.com. You’ll get a free credit report and free credit score, plus the ability to dispute inaccuracies easily and online.
6. Paying off a past-due account will remove that item from your credit report.
Negative information – like late payments and collections – can stay on your credit report for up to seven years from the date of the initial missed payment. Some bankruptcies can stay on your credit report for up to 10 years from the date the bankruptcy was filed.
When you pay off an account that was previously past due, your credit report will be updated to reflect that you’re current on the account. And as time goes on, the negative information will have less of an effect on your credit score. However, as the purpose of a credit report is to keep a tally of your credit history and how reliably you’ve managed your credit, that information will stay put for seven years in most cases.
7. Your checking, savings and investment accounts impact your credit score.
Checking, savings and investments do not show up on your credit report unless perhaps you are delinquent with a payment or past due on monies owed.
8. Paying cash for everything and not having any credit card debt will ensure a good credit score.
Never using credit can actually hurt your credit score. Creditors and lenders often consider people with no debt and no credit cards a higher risk than those who have credit cards and have proven that they’re able to manage their debt responsibly.
9. Small debts like library fines, unpaid parking tickets and utility bills don’t affect your credit score.
It’s not uncommon for libraries to turn over even small unpaid debts to collections agencies, which can wind up on your credit report and significantly impact your credit score. And more and more, utility companies are regularly reporting to credit bureaus.
10. Debit cards and pre-paid credit cards can help you build credit.
Because debits cards and pre-paid credit cards are essentially electronic checks and not an extension of credit, they don’t show up on your credit report. If you’re looking to build credit, using a secured or unsecured credit card responsibly is the best way to go.
Photo Credit: http://www.flickr.com/photos/baptistefranchina/ / CC BY-NC-SA 2.0
October 26th, 2009 at 2:28 pm
Although #9 is important, in most states anything less than $25.00 will not be handed over to a collection agency, thus will not have a negative score on your credit.
November 12th, 2009 at 2:02 pm
After you payoff a collection how soon will it come off you score? How will it impact you credit score?
November 12th, 2009 at 2:42 pm
A collection will stay on your credit report for seven years from the initial missed payment that led to the collection. Unfortunately, a collection is considered a serious delinquency and will likely have a significant negative impact on your credit score. As time goes on, however, the collection you’ve paid off will affect your score less and less. Keep paying all of your bills on time to demonstrate that you can be responsible with your credit – and be patient. In time, if you consistently demonstrate smart credit management, your credit score will rebound.
November 22nd, 2009 at 6:11 pm
Wonderful read, thanks. It’s much easier to understand now what a credit report is really about and how it is important. Even if you are not in debt, keeping a well cared for credit score is vitally important.
November 23rd, 2009 at 10:15 am
As to #10, there are some prepaid credit cards such as AccountNow that will report to a credit bureau and they have bill pay which they report if you pay your bills on time.
January 27th, 2010 at 9:57 am
So how does paying rent every month factor in? It’s not anything with a “credit”. Can you build credit by paying rent on time, and also hurt your credit by not paying on time? or is that only if yoru landlord reports you to a credit bureau?
January 27th, 2010 at 4:29 pm
I think that if you pay rent through a company – such as a property management group, then it would be reported. But I’m not certain. However, I’m pretty confident that if you pay rent to a private individual it will not be part of your score.
January 27th, 2010 at 4:47 pm
Ummmm, no renting doesn’t go on your credit. It’s not a loan. There’s no credit. Rent is just pay as you go. You were never extended any credit. No, no company that rents to you reports anything to a credit bureau. It’s not a loan.
January 27th, 2010 at 11:40 pm
Your rent record won’t be reported as long as you are current, but the landlord can report delinquencies. And if you move out and have past due rent, that can be reported.
As well as eviction notices. Court judgements are reported.
January 28th, 2010 at 8:55 am
When you pay your rent always pay with a check(keep front and back of them) and/or thru online banking so you have easy access to proof payment if you are looking to get a mortgage in the future this helps being you won’t have to hunt down the landlord for a rent history letter, as mortage companies and banks don’t like and accept the cash receipts without verification from the landlord. Even if you share an apartment, pay your part to the landlord directly out of your persoanl account. The only time a a landlord will report is if he has to get a judgement against you
February 3rd, 2010 at 5:02 am
I have found that getting too many credit cards can actualy lower your credit score by decreasing your “average age” of your credit lines. In this case, only time, (and not opening any new accounts) will increase your average age, and eventualy boost your overall score.