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"Fixing" Your Credit

By: Ernie Neve

There’s a ton of information – most of it wrong – available about how your credit score is calculated and – even worse – how it is impacted by you simply being a consumer. The fact is, the economy is tough right now, and with fuel and housing prices up so much, more and more people are relying on “credit” to get them through. 

Let’s take a few minutes this morning to go through some things that really affect your credit, along with some lies about your credit score that simply won’t go away…

·         Your score drops if you check your own credit. (False)  This widespread credit misconception fools a lot of people, but viewing your own report and score is counted as a soft inquiry and doesn’t change the score one way or another. “Hard Inquiries” by a lender or creditor, such as those resulting from your applying for credit – for a home, apartment, car, or even some types of credit cards, can slightly lower your credit score.  If you’re shopping for a loan and concerned about harm to your score, know that multiple loan inquiries within a period of a few weeks are usually treated as a single inquiry to minimize impact.

·         Your balances are the real deciding factor in your credit score.  (True)  If you manage the total balance of available credit you have, and keep it under a certain amount (some experts say that’s 30%, some as high as 50%), your overall score WILL go up.  How fast and how much is a question no one seems to be able to answer, but continuing to pay down balances does help, and keeping those balances under 50% is a known truth for raising your credit score. 

·         It helps to close old accounts. (False)  This credit myth advocates closing old and inactive accounts to hike up your score.  However, there is some evidence that suggests it’s not going to help – and might actually hurt since your credit history is shorter.  If you don’t trust yourself to put a card away in a safe place and not use it, then consider canceling newer accounts.

·         Paying off a negative record means it’s taken off your credit report. (False)  In reality, NOTHING ever seems to “fall” off your credit report, but after seven years, most everything is gone – or at least hard to find.  Paying off a delinquent account  doesn’t mean it’s deleted from your credit report, it only shows as “paid” and the details of that payment can still be read in a negative light. 

Expect that anything that was negative will continue to be seen and calculated as negative until it finally drops off. 

·         “Co-signing” means you’re financially guaranteeing the agreement.  (True)   If you open and account jointly or co-sign a loan, you are held as legally responsible for the financial terms of the agreement.  Any activity on the account – good or bad – will show up on BOTH parties’ credit reports.  The only way to end the dual liability is to have one party refinance the loan or persuade the creditor to formally take you off the account.

·         Paying off a debt boosts your score by 50 points.  (False)  Now, paying off a debt on time DOES increase your score, but there is no clear-cut proof of how much.  The truth is, credit companies arrive at your score via a very complex series of calculations, and they don’t share those with anyone.  It’s almost impossible to calculate the difference in points changing one factor might make.  A far easier strategy is simply this:  pay your bills on time, work to lower your debts and ask that any inaccuracies on your credit report be corrected. A proven record of sound financial behavior and time will have the most significant impact on your score, but even then, no one can say how much that impact will actually be. 

Honestly, credit scores are – I’m convinced – some kind of sorcery, so even though there is no “magic bullet” to maintain them, they can be controlled with some basic ground rules.  Now, they don’t go “up” fast (while they seem to drop at light speed), but when you begin to manage them, you’ll see incremental changes every month – and that’s worth doing.