This is one of my most favorite articles that I have written because it addresses so many questions that people have about credit. I love watching the eyes of my clients widen when they find out the truth about some of these most common myths.
I caution you before we get started In this article, you are going to hear some things that will contradict what you have been told in the past. This is because credit is one of the most misunderstood topics, and most people, even many of those in the financial field, do not really understand credit.
Myth 1: Paying off (or "settling") late payments, tax liens, collections or judgments will remove them from your credit reports.
This is simply not true. In fact, by paying off an old collection account, you can actually lower your credit scores. The reason for this is because more recent negative items will hurt your score more than older negative items. If you pay off an old collection account, not only will the collection account remain on your reports as a paid collection, but it will now show a current date, and cost your more points. I am not suggesting that you should not pay off your delinquent accounts, only that you need to understand the consequences so that you can factor that into your decision.
Myth 2: If I pay my total credit card balance every month, I will raise my credit scores.
Keep in mind that the credit system is designed by the creditors, to help them determine if you are a good credit risk, and if you are an optimal credit user (one who uses the system in such a way that it will generate revenue for the creditors). By paying off your accounts every month, you are not establishing a history of optimal credit usage. What your creditors want to see, is someone who pays slightly more than their minimum monthly payment every month, on time, with only occasional balance pay-downs. This behavior will optimize your credit scores.
Myth 3: Repairing credit is illegal.
Not only is this false, but your right to repair your credit is protected by federal law. The Fair Credit Reporting Act (FCRA) protects consumers from inaccurate reporting, as well as issues surrounding identity theft. As a consumer, you have the right to repair your own credit, as well as hire anyone you choose to do it for you.
Myth 4: Credit Counseling (CCCS) programs will raise my credit scores.
We have all seen the statements made by credit counseling companies that state that their program will improve your credit. I can tell you that this is false. When you enroll into a credit counseling program, one of the first things that happens is a statement is inserted into your credit reports for each account included in the program. This statement will say something like "payments made through credit counseling", or "client in CCCS". This statement itself may not cost you any points; however it is looked at by the lending industry as very negative. It is like putting a sign on your forehead that says, "I can't pay my bills!" In addition, most credit counseling programs will make your payments late, and this will then cause you to have late-pays, which will cost you many points on your credit.
Myth 5: Negative items have to stay on my credit for 7 years because that is the law.
Completely false! There is no such law.
Myth 6: Making a lot of money will give you good credit.
Making a lot of money really has very little to do with your credit directly. What determines your credit is your payment history, account balances, your open accounts, the type of accounts, etc.
Myth 7: I must have excellent credit because I have never been late on a payment.
While never being late is an important part, it is only 35% of your credit scores. In order to have great credit, you need to focus on all the factors that make up your credit scores.
Myth 8: Your credit report from each credit bureau will be the same.
This is not true. In fact, most of the time, all 3 of your credit reports will differ from one another. The reason for this is that each of the credit bureaus is a separate independent company, and the processes at each are different. Also, some creditors may only report to 1 or 2 bureaus, but not all 3. In my experience, your reports will very rarely be exactly the same.
Myth 9: When you get married, your credit reports will be merged with your spouse.
This is not true at all. Even if you are married, you will still have your own unique credit reports. It is possible to see some shared items if you have joint accounts, but your credit reports are yours.
Myth 10: By closing old accounts, I will improve my credit scores.
This is often a huge surprise for many. When you close old accounts, your scores will often drop substantially, sometimes by more than 100 points. Often a lender will ask you to close some old accounts to qualify for a loan, but once the accounts are closed, your scores may actually prohibit you from qualifying. This is good knowledge for to know so you understand the impact of this decision. Old good standing accounts carry more positive weight on your credit scores than newer accounts. When you open new credit, you may also see a temporary drop in scores until those accounts have seasoned (usually 6-12 months).
Now that you are armed with this powerful knowledge, you can get on the road to optimizing your credit today.
With over a decade of experience, Jon Ochs is the founder and CEO of NCA Credit Repair, one of the most respected credit repair services organizations. The website contains tons of free credit resources and information. You can get a unique content version of this article.
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