I talk with people daily about working on their credit. It's funny that many of the people who send people to me for advice end up asking me for advice as well. While I do not know everything, there are some common mistakes and misconceptions running rampant around the world of credit:
- "That's not my account, I just co-signed for my insert favorite family member here, they did it."
While on the surface this sounds great and probably earns you points for being a nice person, it can have devastating effects on your credit and your ability to get a loan. First, IFthe person you got the account for is making payments, than after time, this account will have a positive impact on your credit score. If not, well, it will not be fun for your credit score. The OTHER thing people often ignore is the possible impact on your debt-to-income ratio this can have. While, given enough time, you can POSSIBLY illustrate to the lender that this account is someone else's responsibility, you should be forewarned that it may be counted as an debt in your debt-to-income ratio and could impact your ability to qualify for a loan and the rate that you get on your loan.
- "Ok, I cleaned up and closed all those old accounts!"
At first this doesn't sound like a bad idea. And in some instances it may not be. However, a significant portion of your credit is based on your credit history. Depending on your overall credit profile, closing accounts can significantly shorten your credit history. Obviously creditors and just as importantly the credit modeling systems want to see a long history.
- "But if I check my credit, it will lower my score, right?"
I guess we need to know what your definition of "check" is. If YOU check your credit, that is considered a consumer inquiry and has NO impact on your score and does not show up in your history of inquiries on your report. However, if you credit shop this can negatively impact your score. While no one knows for sure, the credit reporting agencies tell you that like inquiries within the same 30 day period will only count as one. Meaning, if you go to Honda, Toyota and Ford to shop for a car all within the same week or two and each of these companies pulls your credit, that will only count as one inquiry. Historically speaking this was not always the case.
- "I'll just pay those debts off and my credit will jump a 100 points, right?"
Not exactly. While having a good balance of debt to credit (ideally less than 25% of revolving credit - aka credit cards) is good, it won't necessarily give you a needed boost in credit score. Your credit is made of many different components and this is only one of them. This will not make up for other issues on your credit profile.
- "I'll pay what I owe and get those old accounts removed!"
Not so fast my friend. While in the long run paying off accounts that you owe on will improve your credit, your past creditors are in no way obligated to remove the accounts. Your accounts are a snap shot in time. If you had a collection 2 years ago, even if you pay it, it was still an unpaid collection 2 years ago. It MAY be possible to negotiate having this removed, but get everything in writing. Also, if a creditor SAYS"Just send us $500 on that account you owe $1000 and everything will be good", make sure you do two things. First, get them to send you that in writing. Second, don't send them a personal check. Use a cashiers check or money order. I've seen where creditors have gone into peoples account and taken the rest of the money they are owed. It is sad, but true. Bottom line is, you owe it, they want it and if it's not in writing, it does not matter! Collections, charge-offs and bankruptcies can stay on your record for 7-10 years.
So, where does that really leave us? In the end, your credit is much like your health. Moderation is the key. Have several active accounts, but none that are abused (late payments, over or near your limits or collections). Following this credit in moderation for an extended period of time will result in good credit. Don't ever give up. Just as a few bad months or a bad year can really sink you, in most cases you can recover just as quickly.