10 Credit Card Myths That Could Put Your Scores at Risk
Loan applications are being much more closely scrutinized and credit scores are more important than they have ever been for both loan qualification and securing the best rates. In this climate, maintaining or raising your credit score becomes even more important. Unfortunately, there are many myths espousing techniques for improving your credit score that are either very misleading or downright wrong. So keep in mind the following 10 myths before you try and employ a technique that may actually be detrimental to your credit.
Myth #1: You Should Avoid Using Credit Cards
In order to prove to the scoring system that you know how to manage revolving debt, you MUST have active credit card accounts. Use your cards every month, for groceries, gas, etc. and pay most of them off every month. Keep a small running balance to show payment history. If you do not have a credit card at this time and your scores are under 650, immediately apply for an on-line secured credit card at one of the following banks: http://www.orchardbank.com/ or http://www.firstpremierbankcards.com/. If your scores are high enough (ask your bank what the score requirements are), you may want to consider going to your bank to apply for a card. Exception: Do not apply for credit of any type when you are about to enter into or have already entered into a loan transaction. New credit temporarily brings down your score due to the debt and the new account.
Myth #2: Consolidating Debt on to 1, Low-Interest Credit Card Will Increase Your Scores
Per Fair Isaac, if you have a maxed-out balance reported on your credit card statement, you can lose 75+ points instantly, regardless of how good your credit history is. Do not consolidate your credit card debt onto one low interest card UNLESS, if after transferring the debt, the balance on the credit card you are transferring to is under 30% of the available limit.
Myth #3: It's Okay If You Go Over Your Credit Card Limit Because the Credit Card Company Authorized the Purchase
Nothing is further from the truth. Don't go over your credit card limits, even if it's just by one dollar. Doing so deals you a double penalty and you could lose 80-120 points from your scores. Why? Going over your limit makes it appear that you cannot hold to a creditor's agreement and that you are overextended. Something to note: even if you call your credit card company and they approve an additional $200 over the telephone, you still get penalized.
Myth #4: Closing Credit Card Accounts Will Help Your Score
Don't close credit card accounts at all, with the exception of closing a joint account after a divorce. You will lose points in two factors when you close a credit card account, both in the Amounts Owed factor which is worth 30% of your credit score, and in the Length of Credit History factor which is worth 15% of your credit score. (These 2 factors combine to make up nearly half of your credit score, so pay attention here.) The more available money you have that you are not using, the better your score, and once you close the account, you lose the available limit on that card. Also, a common misconception by consumers is they believe when you close a credit card account, any bad history on that account goes away. This is not the case. That history stays with you.
Myth #5: Becoming an Authorized User on Someone's Credit Card Makes You Legally Responsible for the Account
It is true that any activity on these accounts, good or bad will show up on your credit report if you are an authorized user, but unless you are a JOINT owner or Co-Signer of the account, you are NOT legally responsible for terms of the agreement with the creditor, and you can have your name removed from the account at anytime. Keep in mind that any negative history reported during the time your name was on the account will remain, but no further negative history will be reported.
Myth #6: The Type of Credit Card Doesn't Matter
The credit scoring system does not like third-party finance cards (e.g., department store cards, furniture store cards, etc.) Always try to stick with major credit cards (e.g., Visa®, MasterCard®, etc.) It is all considered revolving debt on your credit report.
Myth #7: Your Divorce Decree Protects Your Credit Score
Even if your divorce decree stipulates that your ex-spouse is financially responsible for debt that is held in both of your names, you remain financially liable for that debt until it is paid in full. Both of you entered into a binding contract with the creditor. If your ex-spouse is named as the responsible party for a jointly held debt, and you cannot afford to pay off the account and close it immediately, then you should monitor the account closely to make sure it is being paid on time. Otherwise, negative payment history information will appear on your credit report, and could drop your score by up to 75+ points overnight. Keep in mind that it is against the law for a creditor to remove a late pay without documented proof that it was their error. One late pay can affect your score for many years.
Myth #8: Marrying Someone Who Has Poor Credit Will Hurt Your Credit Score
Although getting married generally means that you'll be combining finances, your credit reports won't be combined. If you open a joint account, the credit information will show up on both reports, but your (or your spouse's) past negative credit history won't be reflected on the other person's credit report unless you add your spouse as an authorized user to an account that has a negative history.
Myth #9: Making Arrangements to Pay a Charged-Off Credit Card Account Will Help Improve Your Score
If you have an old charged off credit card debt and you make payment on it, or make a written or oral promise to pay it, you will renew the 7 year credit reporting statute from that date. The best path to take in this instance is to debt negotiate. Offer the creditor .30 - .40 cents on the dollar as payment in full in exchange for a deletion letter from the creditor.
Myth #10: Those Pre-Approved Credit Card Offers Do Not Hurt Your Score
When you receive one of those pre-approved credit card letters in the mail, your credit report has not been pulled yet, so you are NOT approved for the account. Once you pick up the phone to call the creditor, they will pull your report and you will be penalized immediately for the hard inquiry (10% of your score.) It is best to avoid these types of special offer credit cards (including department store offers of "Open an account today to save 15% off of your purchase."
When it comes to misinformation, there's one thing you can be sure of. It will always be there. If you are considering a loan or refinance in the near future, consult a credit professional well BEFORE you may think you need to. There are certainly techniques that do work, you just need to understand when and how to use them.