Credit Assumptions We All Make, But Shouldn’t! Part 2
The world is full of information, both good and bad, from companies, advocates, friends, family, colleagues, academia, and anyone with an opinion. Some of this information can save you money or even make you money, if you are lucky. Other information can be extremely costly, especially when it comes to your credit score and personal finances.
We have compiled a list of assumptions that we hear on a frequent basis when meeting with clients and provide an alternative way of thinking that will help you increase your credit score.
Recap of Part 1
In Part 1, we covered:
- Paying late fees does not prevent negative reporting on your credit report when you are delinquent with your payments,
- Just because you pay your balance in full each month does not mean the credit bureaus show a zero balance on your credit report and your credit utilization ratio is 0% (0% is the best, 100% is the worst),
- All of your bills do not report on your credit report – rent, utilities, cell phone, cable, and internet do not factor into your credit score,
- Avoiding credit cards is not the best way to have a good credit score, and
- There is life after bankruptcy and you can get rebuild your credit score to >700 if you work at it!
The more income you earn, the better your score.
This could not be further from the truth! Your credit score does not factor in how much you make. In fact, someone that makes $15,000 a year can have a better credit score than someone who makes $15,000,000. All that matters is that you can handle your debt responsibly. As we have mentioned before, your credit score is an indicator of your responsibility to handle debt, not how much money you have. Even though it may seem that having more money would be an advantage, there are many people out there that are unable to handle their money responsibly. Budgeting, responsible credit habits, timely payments, and tracking your spending are more important than how much money you make.
There has to be a quick fix to improve my credit score to get me above 700, right?
Depending on your situation, there might be something you can do to increase your score a few points. If you are just below a 700 score (690+), there might be some changes you can make to bump your score up, but if you are at a 500 and you want to qualify for a mortgage, you need to take a long-term approach because credit scores simply cannot increase significantly in short periods of time. Credit scores assess your risk factor and it would not show much if you could live a life of neglecting your bills and maxing out your credit cards only to make one quick fix to improve your credit score.
The best remedy to a bad credit score is time, making payments on time, and keeping accounts open and less than 30% of your max limits. If you have a maxed out card with no delinquencies, you can pay off the entire card and keep the balance under 30% and you will see a small increase within the next two reporting periods. Another small change you can make is to look at any accounts that have been unused for a long period of time and then make one purchase on these accounts each month and pay off the balance right away. This will help increase your score a little, but not enough to bring you from the depths of bad credit scores.
I paid off my delinquent debts and collections so they should not be on my credit report anymore.
This is not the case. When you pay off collections and delinquent debt, you stop the bleeding from these negative accounts, but they will not disappear from your credit report. Their status will change from delinquent or open to paid in full or settled for specified terms and they will move from the top of your credit report history to further down the list.
A common theme in this post is financial responsibility. This plays into this assumption as well. Since you allowed your accounts to go delinquent, this shows you are more of a financial risk to lenders so simply getting current on your account will not make any bad habits go away on paper. This is why it is so important to pay your bills on time because collections and delinquent payments stay on your credit report for a long period of time.
I have a credit card account that has been delinquent and maxed out and instead of paying the balance I can close the account to improve my score.
This line of thinking is what hurts so many credit scores every day. If only we lived in a world where someone gives you a line of credit that you promise to pay back and instead we just say I do not need this anymore and walk away with no liability. Because this is not the case, each time you close an account that has a balance and delinquent payments, your bad history stays with your credit report for a long time. There is no way to remove your bad habits from a credit report, except changing your habits and being patient.
Another reason why this hurts your credit score is because the longer you have accounts open, the more it helps your score. So, if you close your oldest accounts and you do not have any other accounts or you have young accounts, you will see your score go down considerably because the average length of time your accounts have open has decreased.
I pay my bills on time and my credit card in full each month so I know my score is good.
While it may be correct to assume you would have a good credit score if you manage your debts responsibly and pay your bills on time, there are other factors and issues that may arise with your credit report. We just had a client who was responsible with his credit and payments and assumed he had a high credit score, but it turned out it was much lower than he thought because of a medical collection that he forgot about and there were two credit card accounts that were in good standing and never delinquent that were not reporting on his credit. To the bureaus, he looked much different than in reality because of these errors.
Allowing a medical collection to sit on your credit report for a year or two can have devastating effect on your credit, especially when you should have had two other accounts positively reporting that were missing. Unfortunately this is not uncommon. According to the Consumer Federation of America and the National Credit Reporting Association:
- Almost 78% of reports were missing a credit card account that could have reported positively for the consumer. Other reports were missing mortgage accounts that were also in good standing.
- Another 29% of reports had issues with delinquent payments, meaning that some reported consumers paying later when they actually paid and the number of times they were more than 60 days late on payments. Anytime you are more than 30 days late on a payment, the negative impact on your score increases.
- 80% of all reports had some sort of error on them, ranging from wrong birth dates to accounts the consumer did not apply for.
The bottom line is that you should take a look at your report, because you never know what you might catch. Ignorance is bliss until bliss comes crashing down when you try to purchase your dream home and all your diligent debt management goes out the window because you let errors on your report fester for a long time!
If there was a quick fix to credit scores, we would all have 850 scores! Equipping yourself with the right knowledge and pinch of patience will help much more than trying to find a quick fix. Trying quick fixes often backfire on people because they do not change their behaviors and default back to their old behaviors that got them in their current situation!
What other assumptions have you heard people making when it comes to their credit?