Much like anything, the fabulous world of personal finance is full of credit building myths that just don’t make sense. Seemingly smart financial moves such as closing accounts or paying off loans early, may not be the credit boosters you think they are.
Unfortunately, there are no real quick fixes to credit repair despite what some commercials or ads may have you believe. Usually, those quick fixes result in “avoiding” credit laws and can lead to issues in the future. The key to increasing your credit score is a combination of good payment behavior, time, and a healthy mix of credit types.
To help you sort the fact from the fiction, we will help you tackle some of these myths…
1. Opting out of credit card offers will raise your score
Don’t assume that if you decline credit card offers, you will have fewer credit inquiries on their credit reports. They are considered “soft” inquiries and don’t affect your credit score. You can keep the offers coming if you’d like, but doing so won’t help you build better credit or make it worse for that matter.
If you want to opt out of offers to reduce your junk mail, visit OptOutPrescreen.com. This will remove your name from the credit reporting agency lists for unsolicited credit and insurance offers. That will remove your name for five years. To keep your name off the list, mail in the permanent opt-out election form available on the website. Consumers can also opt in on the website if they’ve already opted out.
2. You can “bump” hard inquiries off your credit report
A “hard” inquiry is generated when creditors pull your report or score after you apply for a loan or line of credit. Your score falls because it shows you’re interested in taking on more credit and therefore, more risk.
Some consumers believe if they pull their credit report every day to load up on “soft” inquiries, they will bump off the hard ones that weigh on their credit score. But there’s no indication that this works and it’s only a small part of your total score (about 10%).
Focus on legitimate strategies such as paying your bills on time and managing your credit accounts properly.
3. Closing old accounts will boost your score
Closing accounts typically won’t help your score and could possibly hurt it if you close an account that positively affected your score. The results can shorten your credit history and leave you with a smaller amount of available credit, both of which can harm your efforts to build better credit.
The length of credit history shows how seasoned of a borrower you are, so the more positive history that you have, the better. Having more available credit helps to keep your utilization rate low. The utilization rate is how much available credit a borrower uses.
4. Opening many accounts will improve your credit score
Some consumers with credit problems believe opening many accounts will be proof that they can handle credit. Actually, it has the opposite effect. It’s a sign of risk and your credit score can suffer as a result.
What lenders will see is a boatload of new, hard inquiries on your credit report. Those inquiries will deduct from your credit score, while lenders will worry that you’re in dire financial straits and desperately need access to credit to pay your bills.
5. Paying off delinquencies will restore your credit score
Nope. It will help, but don’t expect a major boost right away. That’s because the delinquency will stay on your report for a specified period of time, even if it has a zero balance.
Most derogatory information such as late payments, collection accounts, charged-off accounts, tax liens and judgments live on your credit report for seven years before dropping off. A Chapter 13 bankruptcy can linger on your report from seven to 10 years, while Chapter 7 bankruptcies remain on your credit report for 10 years.
6. Paying off loans early is better than making payments
That’s a tricky situation because while it may be good for your personal finances to pay off a loan, it doesn’t do much for your credit score.
While a closed, paid-off account does add to your score, but an open credit account in good standing boosts it more.
That’s because an open account shows you’re consistently handling credit wisely. A closed account only shows good payment behavior in the past and becomes less and less indicative of future habits.
7. Paying before the due date helps your credit score
Your credit score takes into account how much available credit you’re using. Paying a credit card balance in full 10 days or one day ahead of the due date won’t help your utilization ratio and thereby improve your score.
However, if you pay the balance in full before the statement closing date, which appears on your statement, then your report will post a zero balance for that account. That will help your utilization rate and your credit score.
To get started, you will have to pay one credit card bill earlier than usual and then consider your statement date as your due date. Also, you will need to check your balance online or over the phone to make sure you pay the correct amount.
8. All delinquencies are created equal
If you’re in the unenviable position of having to miss a payment, choose carefully. Missing a mortgage or auto loan payment will ding your credit more than skipping a credit card payment will.
Of course, missing a payment is a last resort. Pay the minimum payment to keep accounts current.
9. You can’t have any negatives on your report
Believe it or not, you can have anything from a 30-day missed payment to a bankruptcy on your report and still have a really good score.
The most recent information on credit reports is weighted more heavily than older data. So, if you have a bankruptcy from five years ago, but have had good credit performance since, it’s possible to have a 700 FICO score!