CREDIT MYTHS...

Because the world of credit scoring is largely a mystery, mortgage planners, lenders, and credit experts throughout time have taken educated guesses on which factors determine a person’s score. As it turned out, they were right most of the time, but not always. As a result, many borrowers are operating under credit myths.

Myth #1: The less credit I have, the better my score will be.
Fact: As much sense as this might make to you, it is not true, regardless of what your grandfather says. Credit bureaus want to see that you can handle credit responsibly. Consumers who declare bankruptcy often wipe their hands clean of debt, saying they will never again have another credit card. But what they might not realize is that no credit is just as bad as poor credit. The best way to have a solid credit score is to have a healthy mix of credit and a solid payment history. You have to prove to the bureaus you have the discipline to handle credit. The only way to do this is to have a proven track record.
Myth #2: I can raise my credit score by asking my credit card companies to lower my limits.
Fact: This goes along with Myth #1, and it is usually untrue. If you lower your limit without lowering your balance, your utilization rate could be too high, and credit bureaus see this as dangerous. Contrary to popular belief, a borrower cannot have “too much?available credit. This misconception started in the '90s because loan underwriters would approve a file with the condition that the borrower close his credit card accounts. Many people started to believe that too much credit was a “bad thing.?As of now, loan underwriters don't make this request as all approvals are automated and banks look at the person's credit score, not why the credit score has been assigned.
Myth #3: If I close some of my credit card accounts, I will have a better score.
Credit experts generally agree that once you have opened accounts you should keep them open. Closing them will never help your score, and it might actually hurt your score by lowering you overall utilization rate and shortening the average age of your active accounts, which is one of the reasons Kerry (see page 8) had a declining credit score.
Myth #4: I have to keep a balance to have a good credit score.
Sadly, this mistaken belief causes some consumers to make unnecessary interest payments. The truth of the matter is credit bureaus have no way of knowing whether you pay your balance in full each month or whether you make monthly payments. If you have the financial resources to do so, pay off your balance each month! It can't hurt your score; in fact, it might help your score by lowering your utilization rate. I should note that I have heard of cases where a small balance and recent activity on a credit card have boosted a person's score enough to give him a better interest rate on a loan. That said, the increase is minimal. Generally speaking, keeping a balance is unnecessary, and lenders might prefer a zero balance.
Myth #5: If I request my credit report, I will hurt my credit score.
It is true that having too many inquiries by lenders hurts your credit report, but how frequently you pull your own credit report has no negative impact on your score. The inquiry will show up on your credit report but will not affect your score. Credit bureaus know you need to monitor your credit report, so pulling your own report is considered responsible behavior. Do it freely! Remember you shouldn't bother paying for your credit score because it will be the consumer score and not the FICO score used by lenders.
Myth #6: I cannot get credit because I have had a bankruptcy, a foreclosure, a tax lien, or a bill turned over for collection.
Although it is true that you will likely pay higher interest rates, certain lenders market to people with problem credit. However, getting a lot of credit might not be wise if you are having financial difficulties. Moreover, you probably can't afford the high interest rates. But, having a small amount of credit will help rebuild your score. If you have poor credit, you can, and should, apply for a credit card immediately. You need to start rebuilding your credit now.
Myth #7: Consumer credit counseling will hurt my credit score.
If you are using consumer credit counseling, credit bureaus will list this on your credit report but will not use this information to calculate your score (though they did in the past). Regardless, consumer credit counseling can indirectly hurt your credit score. Consumer credit counseling companies are hired to handle your accounts. This means that creditors will not notify you about the status of your account; they will notify the consumer credit counseling service. It works like this: You pay the service a chunk of money each month. In turn, the consumer credit counseling service disperses the money as it sees fit. It might, or might not, be making your minimum payments. Most of the time, the service will miss payments, but you might not know this because the creditor will communicate directly with the consumer credit counseling service.
If a consumer credit counselor does not pay your bills on time, guess what? Your score suffers. For this reason, you should be wary of some consumer counselors.
And there is more than one reason to avoid consumer credit counseling. Some lenders will not approve loans for people with consumer counseling, regardless of how good their credit score is. In other words, you would be wise to stay far, far away from consumer credit counseling services, even though the act of hiring one will not hurt your score.
Myth #8: If I pay my bills on time and in full each month, I'll have perfect credit.
This is perhaps the most pervasive myth, but it isn't true. As you have already learned, a lot of other criteria affect your credit score. Keep reading for a full picture.
Myth #9: I can increase my credit score by paying my collection accounts.
You will most likely hurt your credit score by paying accounts in collection, which is the other reason Kerry's score dropped (see page 8). We will discuss this in depth in STEP 6, but for now you should know that paying a debt in collection not only will damage your score further but also will extend the amount of time a negative item stays on your credit report.
Myth #10: I can get my credit score for free online.
You will always have to pay for your credit score (unless it is pulled by a lender). Some companies will provide your credit report for free, but they will not include your credit score. To view your credit score, you will need to pay a fee (usually about $14 per credit score). Also note that not all credit scores are equal. Different companies use different methods of collecting data. For instance, automobile companies are interested in the specifics of your credit history as they pertain to installment loans. Most companies that offer credit score to consumers (e.g., WWW.ANNUALCREDITREPORT.COM) use a different system than the one used by mortgage planners and credit card companies, who use the FICO system. If you purchase your credit score online, it will likely be quite different than the credit score your mortgage planner or lender will have. For this reason, you should ask your mortgage planner or lender to pull your credit report. Call (877)720-SCORE (7267) for a referral.
Myth #11: I will hurt my credit if I change lenders midway through the process.
This is a myth that unscrupulous mortgage planners perpetuate to secure your business. If your lender tells you that your credit will be damaged if you switch lenders, he is not telling the truth. Though the new lender will want to pull your credit report, credit bureaus treat all inquiries from a mortgage planner that occur within 14 to 45 days (depending on the credit bureau) as one inquiry. If you don't like your lender, choose another one quickly.