Credit Mysteries—solved!

by: Helena Gray

There are a lot of false rumors out there about what makes a good credit score.  Many of them are even perpetuated by people in the financial industry.  So, before you try to fix your credit, read a few of the following myths and check out www.myfico.com so you can understand what works and what hurts.

Myth—I should close all of my old credit cards

Actually, if you close your old credit cards it can do a lot more harm than good.  When you have a very old credit card out there, it means that you have an older credit history.  Calculations for your FICO score take into consideration the age of your credit history—the longer, the better.  If you really feel like closing a couple cards, close a couple of newer cards that you don’t use, but don’t feel like you have to do it for credit reasons.  Having extra credit doesn’t hurt your score, it usually helps it.  See below for more details.
 

Myth—It will hurt my credit score if I check my credit

No, if you check your credit or even your credit score yourself it will not hurt your credit one little bit.  In fact, it is advisable to check your credit report a minimum of once per year to be on the lookout for identity theft.  You can check each report at no cost one time per year by going to www.annualcreditreport.com.  The three credit reporting agencies are: Equifax, Experian, and TransUnion.  Do be aware though, that applying for too many loans or credit cards in a short time will harm your credit—at least temporarily.

Myth—I have to keep a balance on my credit card in order to build credit

You do not have to pay your credit card one penny in interest or “finance charges” in order to build credit.  Just make sure you ALWAYS pay on time.  The best way to build credit with a credit card is to completely pay off the balance every single month.
 

Myth—A debit card with a visa logo helps me build credit

Your bank will not report your debit card transactions to the credit reporting agencies.  In fact, even if your account is overdrawn, it will not be reported to the agencies.  The only thing to worry about with bank accounts is an inter-bank reporting agency called Chexsystems which collects information regarding account abuse and reports it to other banks.  And then you only have to worry about returned checks and accounts closed with a negative balance.

Myth—If I pay my rent/utilities/phone on time every month it helps me build credit

The reason some people believe that these monthly bills can help build credit is because some companies can use them as “alternative credit”.  Alternative credit is used primarily by the the same types of companies who help you build it, and it is not available on any credit report. Example, say you go to ABC electric company to get the electric turned on and you don’t have traditional credit; in place of your credit score, they will ask you for proof that you paid your bills on time with your previous electric company.  Most banks will not lend you money based on any sort of alternative credit, only credit from loans, credit cards, and mortgages counts.
 

Myth—Too much credit will hurt my credit score

This is one of the most common myths circulating out there.  Sure it seems to make sense that if you have $75,000 in available credit that it would hurt your credit score, but the opposite is true.  Your FICO score takes into account a ratio of your available vs. used credit.  What many people end up doing in an attempt to get a better FICO score is lower credit card limits or shut down credit accounts.  Either will probably actually reduce your score.   You are seen as a much greater risk if it appears that you have maxed out all of your credit.  Here is how this works: A person has $5,000 in credit card and home equity line balances, but still $70,000 in available credit.  That is very advantageous on a credit score.  Later, this same person closes all except $3,000 in available credit because someone said it would help his score.  Now, he is looked at very unfavorably by the FICO score calculator because it appears that he has used $2,000 more than he has available. In short, they see large amounts of available credit as being good discipline.

Myth—A single credit card is enough to help me get a really good credit score

Nope, it is better to have multiple types of credit in good standing than just one.  There are three types of credit: installment loans (such as car or student loans), mortgages, and revolving credit (such as credit cards or home equity lines of credit).  If you have all three (in good standing of course) in your credit history, you are on your way to having great credit.

Myth—I can’t change my credit report

One of the reasons it is good to check your credit reports often is so that you can correct any errors that might be in them before it negatively impacts you.  Errors on your credit report must be disputed to the credit reporting agency.  For example, one time I was applying for a mortgage and was told that first I would have to pay off my American Express card with a balance of $3,200.  Well, I had never owned an American Express card, and upon further investigation discovered that the card was opened when I was only 15 years old.  I wrote a letter to the credit reporting agency and the item was removed from my credit.  It would have been much better though, if I had taken care of the problem when it first appeared instead of discovering it while I was in the process of getting a house.  PLEASE beware though, there are many scams out there claiming that they can make your credit good again even if you have had bad credit.  Don’t believe them!  The only thing you can do is get rid of legitimate errors, and you probably don’t need their help for that.

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