Where, oh where, has my credit gone? 5 BIGGEST CREDIT MISTAKES

By
Mortgage and Lending with Century 21 Mortgage

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:

  1. "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.
  2. "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.
  3. "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.
  4. "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.
  5. "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.

Comments (18)

Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing
Actually Joe, credit scoring is completely counter intuitive - being logical doesn't make sense - since the banks pay Fair Issacs, it's by design.  Wish it weren't true.  Good points - too bad that most most of us think that logic makes sense.
Sep 07, 2007 03:51 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services
I am going to share this post with some of my prospects.  I think it goes a long way to clearing up what impacts the credit score.
Sep 07, 2007 03:53 PM
Doreen McPherson
Homesmart ~ Scottsdale ~ Tempe - Tempe, AZ
Phoenix Arizona Real Estate ~

Hi Joe,

Thanks for sharing this information.  So many people just don't know what it means or how the process works.  Not that it's confusing or anything like that.  :) 

Sep 07, 2007 03:56 PM
Steve G. Snarzyk
Trademark Real Estate, Inc. - Saint Peters, MO
Good "mythbusters" post.  Kate is right, logic just doesn't make sense in the credit world.
Sep 07, 2007 04:01 PM
Debra Hermantin
Southwest Florida Notaries - 941-7-NOTARY - Port Charlotte, FL
Southwest Florida Notaries
Nice to know, thanks!
Sep 07, 2007 04:03 PM
Edson X. Bezerra
Boardwalk Realty of Florida - Fort Myers, FL
Great points you make Joe.  Thanks
Sep 07, 2007 04:14 PM
Joe Kupiszewski
Century 21 Mortgage - Tallahassee, FL

Thanks folks, I really appreciate the comments! 

Fair Isaacs - ironic name notwithstanding, must be related to the IRS :)

Sep 07, 2007 04:21 PM
Robert Caillier
Global Housing Services LLC - Mound, MN
Global Housing Services, Home Loans, Low Rates, Financing,
What about "Co-signing for a brother-in-laws business loan"....where does that fall on the Top 5 Worst Things for Your Credit?
Sep 07, 2007 04:32 PM
Patsy Ittner, Your Premier Broker Selling St. Augustine Real Estate
Little Fox Realty - Saint Augustine, FL
This is great information for the cunsumer, but will they listen?  Probably not.  People have their head in the sand when it comes to credit and money.  And they don't realize that credit is their most important asset.
Sep 08, 2007 04:24 AM
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate
Great post Joe. I was wondering where my credit went?
Sep 08, 2007 11:23 PM
Matthew J Blum - (retired from the business)
Palm Beach Gardens, FL
Joe, The wildest thing I don't understand is paying off Charge off's.. I was working the "What if Scenario" Through my credit agency and my client had an old charge off still reporting. I just played around to see if he would pay it off what would happen... His Score would actually drop 45 pts... How wild is that?  No common sense at all...
Sep 09, 2007 01:27 AM
Anonymous
Anonymous

Robert,

I don't want to discourage people from helping their families out.  There are obvious times where not only is this the right thing to do, but a necessary thing to do.  However, you, and anyone else doing this or considering this, needs to fully understand the potential it has.  First and foremost, when you co-sign - unless the fine print says otherwise - YOU are fully responsible for the debt.  Then, even if the person who is supposed to be paying it doesn't do a perfect job of paying it, it will negatively impact your credit.  Finally, it can also impact your debt-to-income ratio.  Hopefully your brother-in-laws business is doing well and this will be a good thing for you and the family.  Thanks for your comment!

Sep 09, 2007 01:38 AM
#12
Anonymous
Anonymous

Patsy,

Good point.  They tend to listen (at least for a couple of seconds) when they can't get a loan, but of them have stopped by the time they get back in their car!

Sep 09, 2007 01:40 AM
#13
Anonymous
Anonymous

Matthew, 

Great additional information.  Iv'e heard that and seen it before as well.  The problem, as it has been explained to me, is that many charge-offs and collections will stop reporting to the credit reporting agency.  So, you may have a $100 charge-off for something that is 3 or 4 years old.  Well, you decide to do the right thing and contact the creditor and pay them.  Well, they in turn "do the right thing" and report that you paid them.  Now, you have a charge-off or collection that is 1 month old.  One of THE most important factors (all others being equal) is time.  As in, when did it occur. 

Anyhow, thanks for the comment and info.

Sep 09, 2007 01:49 AM
#14
Anonymous
Anonymous
Thanks Joe!
Sep 09, 2007 01:49 AM
#15
Dave Peeples
Century 21 First Realty - Tallahassee, FL

Joe,

Have you looked at any internet credit monitoring services? I'm sure that 90% are scams, but I believe there are some reputable companies that will monitor credit alerts and updates for a monthly nominal fee.

Do you have any that you would recommend (at our own risk)?

Dave

Sep 10, 2007 12:17 AM
Joe Kupiszewski
Century 21 Mortgage - Tallahassee, FL

Dave,

From a reputability standpoint, I know people that have used myFico - www.myfico.comfor monitoring - but it looks like they only do Experian.  I've used www.Truecredit.comwhich seems to be aligned with Transunion and they monitor all 3 plus give you identity theft insurance.  I think the insurance is a nice feature.  Both of these are good.

If you are going to do this, I would recommend doing it right.  Keep in mind two things when you are looking for a service:

  1. If you aren't monitoring all three credit reporting agencies, you may be getting a false sense of security.  I would use the analogy of having a house alarm that doesn't detect all your windows being opened - just the front and back door.  Certainly better than nothing, but not truly secure.
  2. The credit reporting agencies don't catch the criminals for you (at least none that I've found).  You need to be the one monitoring the reports they send you. YOU need to know what accounts you have and which "relatives" are using your information.

Keep in mind that all of this, at least in my opinion, is just another form of insurance.  That is why I like that fact that Truecredit offers some insurance with it.  If your identity is never stolen and you always pay all your bills on time, you should never run into an issue, but if you know someone who has had their identity stolen (my brother had his stolen) you know what a giant pain it can be.

I'd be interested to know if anyone else out there has used any of these services.

Thanks for the thoughts Dave

Sep 10, 2007 02:51 AM
Rich Covert
Tallahassee Real Estate Holdings, LLC - Tallahassee, FL
Good Information!  Thanks Joe!
Sep 12, 2007 05:28 AM