Time to Bury These Myths About Credit

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By Jenna Lee

Some credit myths refuse to die. Let's go over three major myths that you should stop believing today.

You Only Have One Credit Score

Reality: This myth likely exists because we want it to be true. Credit scores would be so much easier to understand and cause less stress if we received the same scores from each lender. However, the reality is that you actually have many credit scores.

This is mainly due to a few reasons. First, your credit score is based on your credit report, so if the three major credit bureaus -- Experian, Equifax (EFX) and TransUnion -- have differing information, your scores can vary. Dozens of credit scoring models can be used to calculate your scores –- yes, even within the popular FICO model. If one scoring model emphasizes your on-time payment history while another puts more weight on your credit utilization rate, you're bound to end up with different scores, even if they're based on the same information.

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750 is the new 720 -- at least as far as average credit scores go. As today's lending requirements remain tight, credit is harder to come by, and it's tougher to get an above-average credit score than it used to be. A higher score could translate into a better interest rate and save you thousands of dollars. Whether you're thinking of refinancing your mortgage, purchasing a new home, or taking out a car loan, it's especially crucial today to understand what affects your credit report -- and what doesn't.

There are common misconceptions about credit reports, and believing in untruths can hurt you. Read on to learn more.


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Myth: I can boost my credit score by closing credit cards I don't use.

Fact:
Think twice before closing an account -- especially if it's a credit card you've had for several years. Your credit rating is determined in both the duration an account has been open and the balance in relation to the card's limit, says Rodney Anderson, managing partner of Rodney Anderson Lending Services in Plano, Texas. If you're inclined to close your account, you're much better off just sticking the card in a drawer, but keeping your account active by using it at least once every three months.


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Myth: Checking my credit report will lower my score.

Fact:
A "hard credit pull" -- the type of examination that's made for those applying for a new credit card, say, or a mortgage -- stays on a credit report for at least six months, and it will lower a credit score. But checking your own credit report, contrary to hurting your score, is "a great tool, especially when you're making big-ticket purchases," says Charles Harris, an executive at FreeCreditReport.com. "The higher your score, the more likely you may be able to negotiate lower interest rates, which gives you more control over your personal finances."


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Myth: My age, race, gender, marital status, religion, or income can affect my credit score.

Fact:
Not true, says Lynnette Khalfani-Cox, author of Zero Debt: The Ultimate Guide to Financial Freedom. Federal law prohibits credit scoring from taking any of those factors into account. In fact, records maintained by the reporting agencies include no personal demographic information apart from birthdates.


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Myth: If I negotiate with my credit-card or mortgage company, my credit score will go down.

Fact:
Not necessarily, says Spencer Sherman, author of The Cure for Money Madness and founder of financial advisors Abacus Wealth Partners. "If you're up-to-date with payments, then negotiating your credit-card or mortgage payments will not likely affect your score," he says. To protect your score, he advises, try extending the term of the loan or negotiating a reduction in interest rate, rather than trying to get the principal reduced.


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Myth: I pay cash for everything and don't buy on credit or use credit cards, so my credit score should be excellent.

Fact:
Having no credit history, or never using credit, can actually hurt your score, Khalfani-Cox says. Card issuers tend to view customers with neither debt nor credit cards as higher-risk than those who have cards and who manage their debt responsibly. Credit-rating agencies like to see that you have a history of paying credit obligations on time.


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Myth: My $6 library-card fine couldn't show up on my credit report.

Fact:
Return your overdue books at once. Even miniscule library fines can lower a credit score by as much as 50 to 100 points, says Rich Rosso, a financial consultant for Charles Schwab & Co. Same with unpaid parking tickets and utility bills. If you pay up before your debt reaches a collection agency, you should be OK; your library probably posts its collection-agency policy online. "Every municipality appears to have various time frames for collection based on size of the debt and the length of time it's been in arrears," Rosso says. For example, Cedar Rapids Public Library in Iowa will initiate a courtesy reminder three times after items are due. If fines are still not paid and books not returned, then the borrower's account may be turned over to a collection agency.


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Myth: If I pay off a collection account, my credit score will clear immediately.

Fact:
Not so. "Paying off a collection account will not remove it from the credit report," Rosso says. "It will remain for seven years." Still, a collection account is just one aspect of your credit score; if you're up to date on mortgage and credit-card payments, the collection account probably won't drastically damage your score.


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Myth: As far as credit rating is concerned, all credit cards are the same, whether it's a Visa, an American Express, or a card from a department store.

Fact:
Stay away from store-brand credit cards. Approximately 10 percent of a person's credit score is based on the institutions from which money is borrowed, says Anderson. Finance companies, often used by retailers that offer their own credit cards, are considered higher risk than banks. Wal-Mart cards, for example, are backed by GE Money Bank, and Ann Taylor credit cards are issued by the World Financial Network National Bank. "A prevalence of credit lines from finance companies could negatively affect your credit rating," he says.


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Myth: It's OK if my card issuer lowers my credit limit a little bit -- I never max out my cards. I keep my balance lower than 75 percent, so I should be fine.

Fact:
That's wrong, Sherman says. "Most people stay just at the edge of their credit limits, but you want to stay well below your maximum available credit." That's because 30 percent of your credit score depends on how much credit you use of the total credit available to you. Aim to keep your balance below 35 percent of your limit.


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Myth: I don't make enough money to have a good credit score.

Fact:
While people with more money tend to have better scores, your income has no effect on your credit score, says Avinash Karnani, co-founder of justthrive.com, a personal-finance management site. "People who make more money are less likely to be borrowing above their limits and paying for things on credit, rather than using existing funds," Karnani says. But anyone can improve his or her credit score by paying down debt, monitoring your credit report to track how often you're applying for cards and loans, and making sure to keep your oldest credit card open so it remains in your credit history.


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Implication: Believing in this myth could scare you into unnecessarily paying for your scores each month. Many consumers subscribe to credit monitoring programs, thinking they are getting the same score their mortgage lender and/or credit card issuers see. However, as explained above, the likelihood of that happening is not good.

Takeaway: Be wary of purchasing information about your credit score. There's no way to guarantee the score you buy is the score a potential lender will pull. According to a 2012 study by the Consumer Financial Protection Bureau, different scoring models place consumers in the same credit range 73 to 80 percent of the time. So although you may hear that you should only buy and trust FICO scores, the high correlation among different scoring models proves that free scores (which you're entitled to receive from the three credit bureaus each year) can actually be useful and trustworthy.

You Need to Carry a Balance to Have a Good Score

Reality: You don't need to carry a balance at the end of the month to improve your credit health. The balance reported to the credit bureaus is typically the balance from your last statement -– not what was left over after you received that statement and paid the bill.

Implication: If you believe in this myth, you may be carrying unnecessary debt, paying interest for no good reason and lowering your credit score by keeping your credit utilization rate higher than it needs to be.

Takeaway: Use your credit cards, but pay your bills in full as often as you can. You don't need to pay a penny of interest to have a good credit score.

Credit Bureaus Are Always Accurate

Reality: This is another myth that we wish could be true – wouldn't it be great if we didn't have to worry about incorrect information on our credit reports? However, the sad reality is that one in five consumers have errors on at least one of their three major credit reports, according to the Federal Trade Commission, and these could negatively affect their financial situation.

%VIRTUAL-article-sponsoredlinks%Implication: This has the potential to hurt you the most. If you have a major error on your credit reports, your credit score could be lower than it should, which can impact your ability to get approved for credit or cost you thousands of dollars because of the undeserved subprime interest rates that have been attached to your credit cards and loans. Even a seemingly meager 25 point difference could drastically affect your finances.

Takeaway: It may not be fun, but if you care about your credit health, it's important to pull your full credit reports from AnnualCreditReport.com each year, scrutinize them for errors and dispute any errors you find. With your credit health on the line, the time and effort you put into fighting incorrect information will be well worth the trouble.

The bottom line: With the Internet at our fingertips, it has become easier than ever to educate, take charge and improve our financial situations. Use this information highway to your advantage and begin working on improving your credit health today.

Jenna Lee is the social media manager for CreditKarma.com, a free credit monitoring website.

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