Young woman phoning the bank for credit card support

Your credit score is an extremely important number. It has the power to determine how much money you can charge on your credit card, your ability to qualify for a mortgage and even your chances of landing a job.

With so much of your life, financial and otherwise, balanced on the amount of money you owe, the length of your credit history, the type of credit you have and new credit that’s been added, it’s no surprise that many people work tirelessly to improve their credit score. After all, depending on your score, you might have to pay a higher premium on loans.

Myth: Paying My Debts Will Clear Up My Bad Credit History

Of course, it’s always a good idea to pay off your debts. In fact, your payment history makes up 35% of your credit score, so it’s no surprise that late payments have a strong impact on your score.

However, late payments still appear on your credit report after you pay them off and will ultimately impact your credit score, and the more late payments you make, the more your credit history will be damaged.

In fact, late payments over 30 days will remain on your report for seven years.

A common credit misconception is the belief that paying your bill on the day of the due date is acceptable. But make sure you’re checking the payment posting date. Oftentimes, the payment doesn’t get posted right away and could result in a late fee.

The Solution

The good news is, if you’ve only made one late payment in the past, it likely shouldn’t affect your ability to get a mortgage. In fact, the greater the age of the missed payments, the less impact they have. However, if you’ve made a late payment recently, mortgage lenders may wonder about your reliability as a borrower.

Unfortunately, this isn’t something you can fix right away. If you’ve made late payments, it’s going to take work to rebuild your credit score. This includes paying your debts on time, every time. It’s the surest way to prove to lenders that you’re responsible when it comes to using credit. Even if you’re just making the minimum payment, it’ll benefit you in the long run to pay on time.

Myth: I Can Pay Someone to Improve My Credit

It’s possible to have corrections made to your credit report if mistakes appear. Many credit reports have mistakes, ranging from an incorrect address to missing accounts that are in good standing.

If mistakes appear, you can dispute them with the credit bureaus. If your dispute is valid, the credit bureaus are then legally responsible for rectifying the mistake on your report. In addition, some credit repair companies will even dispute the error for you.

Companies that do this flood the credit reporting agencies with dispute letters, which ask the creditor to verify the entry. If the entry can’t be verified, it must be removed from the listing. But if it can in fact be verified, then the agency will put it right back into your file after 30 days. If there are actual errors, you may be better off disputing them yourself.

The Solution

For the reasons we’ve already discussed regrading what’s at stake with a lower credit score (qualifying for a mortgage, landing a job, etc.), it’s definitely worth your time to clean up your credit report.

Read your credit report and verify that your information is correct. Any errors could potentially cost you a lot of money in loan interest or prevent you from qualifying in the first place. If you find an error, you can dispute it through a credit repair company or on your own online or via mail. After you dispute the error, credit bureaus have 30 days to review your request and rectify the situation; you should check your report after that time frame to make sure the changes are reflected.

Myth: If I Cancel My Credit Cards, My Score Will Go Up

This is not a good idea since your credit score is based, in part, on the length of your credit history. If you have a credit card that you’ve owned for a number of years, whether you use it or not, closing it is not a good idea.

Creditors like to see that you have about two to three active credit accounts managed wisely. Opening and closing multiple accounts in a short period of time can also look irresponsible.

The length of your credit history is one of the main determining factors of your credit score. By closing a credit card, you’ll shorten the length of your credit history and most likely negatively affect your credit utilization ratio, another factor that impacts your credit score.

The Solution

Avoid this common credit card mistake by keeping the cards open and continuing to use them, even if only every once in a while for small purchases. This will benefit you in the end. And as mentioned above, pay your bills on time. Even if it’s just the minimum payment, continuing to use an older credit card will lengthen your credit history and benefit your score.

However, should you still choose to close a credit card, make sure the balance is paid off in full before you close.

Myth: Credit Counseling Will Hurt My Score

There are many factors that go into calculating your credit score. The truth is that credit counseling is not one of them. However, creditors report your account in one of two ways.

For example, say your $650 monthly payment is renegotiated by the credit counselor to $400. The creditor can report it as $250 in arrears, meaning that you didn’t make the full payment all at once, or they can report your account as current and up to date to reward you for making the effort and not filing for bankruptcy.

If the account is reported not up to date, then that may affect your score. But your score is not affected by the fact that you are attending credit counseling. And credit counseling is a very good idea if you need help managing your finances to get yourself out of debt.

The Solution

Credit counseling won’t make the money you owe disappear. You will, however, receive advice on how to reduce your spending, pay down debt slowly over time and change bad financial habits.

Credit scores won’t take a hit during credit counseling, even if they sign up for a debt management plan. However, if you’ve been through credit counseling and don’t make your new monthly payment on time, you will see your credit score quickly fall, as it’s reported just like any other late payment.

Avoid Credit Mishaps

Just as there are many ways to improve your credit score, there are also numerous ways that you can avoid hurting your score.

The first – you guessed it – is paying your bills on time. Even the minimum payment balance will keep you from seven years of a lower credit score. In addition, pay off any debt rather than shuffling it from one credit card to another. You can’t avoid it forever. Make the payments and keep your credit score out of trouble.

Keep your credit card balances low – creditors like to see that you can manage credit responsibly. This means living within your means. Don’t overextend yourself financially by racking up a bill you can’t afford. Create a budget to decide what you can spend and make sure you’re making the monthly payments.

Lastly, pay attention to your credit report. It’s not the most thrilling document you’ll ever read line by line, but if you can stay on top of any disputes and keep your report clean, you’ll benefit in the end. You can check your credit report on a regular basis for errors and discrepancies. By law, you’re allowed one free copy of your credit report per year from each bureau by going to AnnualCreditReport.com.

Managing your credit wisely and maintaining a good credit history is the key to getting a better loan. Lean more about how your credit score affects your mortgage eligibility and let us know in the comments below if you have any credit myths you’d like to bust!

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This Post Has 2 Comments

    1. Hi Darnell:

      Race is not a factor in the credit scoring system. If someone is taking your race into account in a loan or credit approval, that’s illegal. If someone is doing that, I would report it to be investigated by the proper authorities. That being said, FICO does have some guidelines regarding what is factored into your credit score. Good luck.

      Thanks,
      Kevin Graham

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