Myths Regarding Your Credit Rating

People are often left feeling confused over their credit rating. What helps and what hurts in the land of credit? What can I do to improve my score? What should I avoid doing? Questions such of these bounce around in their minds, remaining unanswered. In addition, many have received advice from their lenders, friends, and co-workers only to find out their friends had no clue what they were talking about. This can leave you feeling extremely confused and can cause your credit rating to plummet as you make the wrong decisions.

Myth 1: Closing Unused Accounts

The most important thing you can do to improve your credit rating, if you have a credit account that has been paid off, do not close the account down! Reducing untouched accounts actually worsens your credit rating. The extra credit pads the amount of credit you owe versus the amount of credit you have open.

If you owned four cards and had $5,000 credit lines on each account, that adds up to $20,000 in your credit line. If you owe $1000 on each card, the ratio becomes $4,000 out of $20,000 that is owed. If you then pay off one card by switching it to another and shut down one account, you now owe $4,000 out of $15,000. The ratio has changed. If you paid off the amount, the bank looks at the $4,000 out of $15,000 and feels that decreased line of credit is detrimental. This can negatively impact your credit report.

Myth 2: Don’t Check Your Credit Score

Checking your credit score counts against you is another common myth. There is some truth to this, but there is a loophole. The major credit bureaus count groups of activity in one month as one transaction. Therefore, if fourteen banks check your credit report in one month’s time, it counts as one check. If you have one bank checking every month, in a year’s time that counts as twelve checks and it will count against you.

Myth 3: Everyone Must be Checked

Another myth is that you must check your credit report with every reporting bureau. The truth is that the bureaus all use the FICO credit scoring system. Therefore, the information is going to be the same with each bureau. Additionally, people are entitled to one free credit report per year. Therefore, checking with all three companies means you will end up paying twice for the same report you received for free.

Myth 4: Debt Counseling and Bankruptcy are the Same

Bankruptcy and credit or debt counseling count against you equally is another myth. Although they are both recorded on your credit report, debt counseling shows you made an honest effort to repair your credit history. This actually adds points to your credit report. You must watch that the firm with performing your debt counseling actually paid your bills on time, however, or it will look bad on your report. Some of these businesses pay late and that will count against you, even though you are not in control of your bills. Keep records of everything so you can effectively fight it if this situation does arise.