Managing credit is one of the most common subjects that I’ve been getting asked about lately. Perhaps it’s because so many had their credit scores damaged during the recession and are now trying to improve them in order to qualify for the record low mortgage rates we’ve been seeing. In addition, employers have increasingly been using credit scores to evaluate applicants and especially in this job market, every little factor really counts. So regardless of your motivation to increase your credit score, here are some of the most common credit myths I’ve heard that could be hurting your score:
1) I haven’t done anything wrong so my credit is fine. Even if you’ve done everything right, your credit could still be in trouble. That’s because 70% of credit reports have errors on them. In the likelihood that you have one of them, you could be paying more in interest than you need to be.
2) If I check my credit report, it will hurt my score.
Checking your own report generally doesn’t hurt your score but errors do so don’t let this be an excuse not to do it.
3) I’ve checked my credit report and there are no errors so I don’t have anything to worry about. You actually have 3 credit reports (from Experian, Equifax, and TransUnion) so if you’ve only checked one, there’s still a chance that errors on one of the others is hurting you.
4) I can check my credit reports for free at freecreditreport.com. First, many sites like this only give you access to one report, which is from Experian in this case. Second, freecreditreport.com ironically isn’t exactly free. It’s one of many copycat sites that charges you a fee to see your credit report and then charges you a monthly fee unless you cancel within a short period of time. Instead, you’ll want to go to annualcreditreport.com, which allows you truly free access to each of your credit reports once every 12 months.
5) I should always make payments on old debts.
While it may feel like the right thing to do, the debt collector will be unable to sue you for it if the debt is older than your state’s statute of limitations. However, if you make a payment, it could actually reactivate that time period and give the creditor a chance to file a lawsuit against you. If it’s older than 7 years, it shouldn’t even be on your credit report at all so have it removed and forget about it.
6) I should use a debt settlement company. The first thing debt settlement companies usually do is collect your payments and withhold them from the creditor in order to settle the debt for a lower lump sum payment later. The problem is that until the debt is settled, this strategy could result in a lower credit score, harassing phone calls from creditors, and even a lawsuit against you. If you have debt within your state’s statute of limitations but you can’t afford to pay it back in full, you could avoid the debt management company’s fees by trying to reach a settlement yourself. Just be sure to let them know that you’re considering filing for bankruptcy protection. Another option is to work with a nonprofit credit counselor that can negotiate on your behalf.
7) I should always close a credit card after paying it off. This can actually hurt your credit score in a couple of ways. If it’s a card you’ve had for a while, closing it can reduce your credit history, which is about 15% of your score. Second, if you have any debt, closing a card can increase your debt utilization or the ratio of debt to credit available. Keep in mind that you can always cut up the card and simply not use it.
However, there are also a couple of reasons to close a credit card account. One is a steep annual fee but you can always ask them to switch the card to a no-fee one. In addition, closing a card can help your score if you have too much credit available. To see if this is the case for you, you can see the effect of closing a card and other actions on your score at sites like Credit Karma, Quizzle, and Credit Sesame.
8) Bankruptcy is the end of the world.
Yes, it’s painful and can take 7-10 years to be removed from your credit report but many people’s credit scores are practically recovered within just a few years. If you can’t pay your debts, think of bankruptcy as a second chance that’s better than allowing the debt to continue hurting your score.
9) Maintaining a balance on my credit cards will increase my credit score. Opening and using a credit card can increase your score, especially if you’re starting to build or rebuild your credit, but keeping a balance will only increase your interest payments. If anything, the opposite is true since having a lot of debt can hurt your score.
10) I need to pay a company like LifeLock to protect my credit. You can get free daily credit monitoring through Credit Karma. Even better, you can put a security freeze with each credit bureau for at most a nominal fee to help prevent identity thieves from opening an account in your name.