The business of credit can be complicated. It’s taken me a long time to sort out how credit reporting works and, for the most part, I’ve been able to use the rules and guidelines to my advantage. Following are some common misconceptions, and how you might raise (or lower) your credit score.
MISCONCEPTIONS
Closing Credit Accounts Will Improve Your Credit
It seems logical. You pay off a card, and close it so you will no longer be tempted to use it. And, having less open credit cards could only make lenders look at you as more responsible, right?
Wrong. Lenders don’t care how much credit you have available, they care how much you’re using. Your debt-to-credit ratio is one of the common measures used by the credit reporting agencies, and closing accounts will increase this ratio – this is not a good thing.
For example, say you have 10 open cards with a total credit line of $50K, $10K of which you’ve utilized. Your DTC ratio in this case is 1:5. If you were to close 2 of those accounts, reducing your total credit line to $30, your DTC ratio would then be 1:3, meaning you’re using one-third (33%) of your available credit, instead of one-fifth (20%).
If you feel you must close some accounts, focus on those with lower credit limits, such as store cards. However, I would not recommend it in this current credit climate because lenders are closing unused accounts left and right. In fact, some experts have recommended that people start using their cards once or twice a month (and paying them off monthly, obviously) to ensure those lines of credit remain open.
All Credit Reporting Agencies Are The Same
Again, seems logical. However, the three credit reporting agencies (Experian, Equifax and Transunion) are private/public (read: non-government) companies and competitors. They use different models for calculating credit scores. If you would like to check your credit through all three reporting agencies, you may do so for free once a year through Annual Credit Report Dot Com.
Credit Scores Aren’t That Big Of A Deal
Sorry, but they are. Everyone should take their credit scores seriously, as they are not only used by lenders, but landlords, insurers and, increasingly, potential employers. Some people swear off credit cards, but the plain fact is that they’re useful for establishing credit and should be used, responsibly. Not establishing your credit is a big mistake.
Making Minimum Payments Is Better Than Nothing
Sure, better than nothing, but not by much. You might maintain somewhat decent credit, but you’ll spin your wheels. Paying even 10% above your minimum can do wonders in decreasing you debt owed, which will decrease your debt-to-credit ratio. Whenever possible, pay above the minimum due.
Paying A Bit Late Is Not That Big Of A Deal
You must pay at least 30 days late for a delinquency to show up on your credit report (the are noted as 30/60/90/120+ days late). However, paying late has other ramifications. You will be charged a fee by your lender and your interest rates will shoot up, meaning you will pay more in finance charges, increasing your DTC ratio.
HOW YOU CAN LOWER YOUR SCORE
“Shopping” For Credit Excessively
Missing Payments
Ignoring Medical Or Utility Bills
Overusing Your Available Credit & Maxing Out Your Credit Cards
Failing To Report Changes In Address To Lenders
HOW YOU CAN RAISE YOU SCORE
Establish Yourself As An On-Time Payer
Keep High Credit Limit Cards Open
Use Cards Often If You Can Pay Balances Every Month
