Building or restoring a credit score is never easy. Many little variables can throw your attempt off track. This is why you make every effort to research about improving your credit score. You look for secrets, special techniques that can give you the upper-hand.
Much of what you read into is a blatant lie, or an exaggeration of the truth. In fact, some credit score improving strategies can end up doing more harm than good.
Start by reading about each of these seven myths about improving your credit score.
1. “It’s Good to Pay Off Debts”
Of course, you need to keep up-to-date on your credit card payments and similar recurring credit-related bills. But, you don’t want to make the mistake of paying off debts and getting negative results on your credit score.
There are two scenarios where paying off a debt is a bad idea:
Scenario A: It’s a debt in collections, but you can only afford to pay it off in installments. By making continuous payments, your credit report keeps posting new entries. These show as a negative every time. If it takes four years to pay the debt off, then seven years to vanish from your report, you will tarnish your credit score for 11 years.
Scenario B: It’s an account that will close once it’s paid in full, and it’s not new. Credit scores are, in part, calculated by the age of accounts. This weighted average relies on older accounts. If you only have one aged account, then you will notice a large credit score drop once it closes.
2. “Bankruptcy Is Not a Solution”
People look at bankruptcy as only being a suitable option when in over your head on a mortgage or falling deep into the red on a business investment. Even for personal credit rebuilding, the bankruptcy option is a great one to have.
Remember the first scenario in myth 1? That leaves you waiting 11 years before you can enjoy a quality credit score. In cases where a Chapter 11 Bankruptcy is suitable, your negative credit score will be void after seven years. If you stress about losing your car, home, and etc., then Chapter 13 Bankruptcy will work better. Chapter 13 takes 10 years to drop.
Of course, this is a tight squeeze and you may argue against bankruptcy. You may be able to build positive credit accounts while paying on your bad debts. These will gain age, while you won’t be accomplishing that during a bankruptcy. In most cases, bankruptcy is the ‘last resort’ but it definitely makes sense if you are not confident in your ability to clear your bad debts within a few years.
3. “Hard Inquiries Cause Erasable Damage”
A hard inquiry is a credit report defect that can cause a decrease in your credit score. The damage it does will heal on it’s own over time. But, many think it’s possible to have hard inquiries taken off a credit report early. This is not the case.
This mythological strategy implies that you can erase the hard inquiries quicker by pulling your own report every day. This takes hold of two assumptions: soft inquiries in volume won’t hurt your credit, and inquiries drop from a report by volume, not time. The problem with this theory is that it’s only speculative.
There is no evidence to support the theory of a finite allowance for inquiries. If anything, one should assume it would do more harm than good. The risk of this strategy does not outweigh the reward. The hard inquiries do a slight blemish, but heal over time, while manipulative techniques could completely tarnish your report. Plus, you never know when the credit bureaus will decide on a “better” impact for credit reports with voluminous lists of inquiries.
4. “Early Credit Card Payments Help”
Many have the wrong facts about the algorithm for credit score calculation. The big mistake here is that most think the credit score will read better if all owing gets paid each month. People assume paying before the payment due date will be enough to better your credit score. In fact, many younger individuals use this as a first step to establishing good credit.
If you plan to use your credit card for running expenses, it’s possible to improve your credit score that way. But, you need to make the payment before the statement closing date. If you do so, the credit card company will report no balance owing to the credit bureaus. If you miss this deadline, but pay before the due date, it will show as if you still owe.
You can improve your credit score with early payments, just change your payment schedule to accommodate the statement closing date. Then, you will have the best utilization ratio possible and your attempt to build or restore your credit will work.
5. “Negative Marks Will Always Weigh You Down”
You don’t need to be stress over missing a payment. Yet, that’s not something that should ever arise if you are responsible with your credit lines and finances. A medical emergency that pushes you back a month or two will not mean seven years of misery. In fact, even bankruptcy can turn into a ‘minor’ blemish before it’s all off your report.
The thing about your credit report is that the metrics for weighing each item is different. If there is a bankruptcy, a closed account, or anything else from years ago, it has a lesser impact than your more recent items. You can’t flood the old stuff away, but something like a late payment won’t matter (to your score) when it’s a few years old.
Of course, a bankruptcy is a large credit move and it’s impact will continue to weigh you down. You are lucky to be in the United States, as many countries don’t allow effective credit building until it drops from your report. This ties in with myth 2, as it further shows how filing for bankruptcy may be the best credit repair solution available.
6. “The Fewer Credit Cards, the Better”
Credit cards are one of the main ways people use credit and improve their credit score. It’s installed in people’s brain that having a lot of cards will do more harm than good. Applying for or getting a lot of new cards will definitely hurt your credit. But, you don’t want to get rid of any of your old cards.
Even if you have a dozen active credit cards, all five-plus years old, it’s not a bad thing. Canceling a few old credit cards could drop your credit score by as much as 150 points. It’s not just the age of the account, affecting your average credit age. Your credit availability lowers, weakens most ratios that matter for calculating your score.
Keep any established credit cards and avoid taking on too many new credit lines at once. You can just hide the card and leave it without any money owing. The further aging will do even more to increase your score.
7. “Cosigners Are Only Responsible Upon Default”
A cosigner does not just put herself or himself at risk if the cardholder defaults. Many think that’s how it works, but there are bigger risks involved.
Cosigners hold equal responsibility for delinquencies on the credit account. If a payment is late, this affects both the cardholder and the cosigner. You may feel confident in your ability to pay the card off if the cardholder defaults. But, you could still get blemishes on your credit report for delinquencies that may be out of your control.