This is one of my most favorite articles that I have written because it addresses so many questions that people have about credit. I love watching the eyes of my clients widen when they find out the truth about some of these most common myths. I caution you before we get started In this article, you are going to hear some things that will contradict what you have been told in the past. This is because credit is one of the most misunderstood topics, and most people, even many of those in the financial field, do not really understand credit. Myth 1: Settling or paying off tax liens, collections, late payments or judgments will erase them from your credit reports. This is simply not true. In fact, by paying off an old collection account, you can actually lower your credit scores. The reason for this is because more recent negative items will hurt your score more than older negative items. If you pay off an old collection account, not only will the collection account remain on your reports as a paid collection, but it will now show a current date, and cost your more points. I am not suggesting that you should not pay off your delinquent accounts, only that you need to understand the consequences so that you can factor that into your decision. Myth 2: If I pay my total credit card balance every month, I will raise my credit scores. Keep in mind that the credit system is designed by the creditors, to help them determine if you are a good credit risk, and if you are an optimal credit user (one who uses the system in such a way that it will generate revenue for the creditors). By paying off your accounts every month, you are not establishing a history of optimal credit usage. What your creditors want to see, is someone who pays slightly more than their minimum monthly payment every month, on time, with only occasional balance pay-downs. This behavior will optimize your credit scores. Myth 3: Credit repair is not legal. This is far from the truth. In fact, credit repair is legal for you to do on your own, or hire anyone you choose to do it for you. Repairing your credit is a right protected under the Fair Credit Reporting Act (FCRA). Myth 4: Consumer Credit Counseling will improve my credit. Credit counseling programs do not help you increase your credit scores. In fact, they will usually harm your credit in a couple of ways. First of all, when you enroll into a credit counseling program, your creditors will insert a line on your credit reports for each account included in the program that states you are in credit counseling. This looks very bad to lenders that you may be applying for loans with. Also, in most cases, credit counseling programs will make your payments to your creditors late. This will result in additional late pays on your credit reports. Myth 5: The law requires that negative items stay listed on my credit for 7 years. This is not true. The law only states that an item can remain for as long as 7 years, if it can be proven to be true and accurately reported. Some items such as bankruptcy, can remain for as long as 10 years. There is no law that states that any item has to remain on your credit for any set period. Myth 6: If you make a lot of money, you will have great credit. Actually, your credit scores are made up of several factors such as payment history, account balances, types of credit in use, etc. Your income is not one of those factors that determine your credit scores. Myth 7: As long as I have never been late on a payment, I will have great credit. While never being late is an important part, it is only 35% of your credit scores. In order to have great credit, you need to focus on all the factors that make up your credit scores. Myth 8: Your credit reports will be identical from each of the 3 major credit bureaus. Wrong again! Most, if not all the time, your credit report from each credit bureau, Equifax, Experian, and Transunion, will be different. Not all creditors report to all 3 credit bureaus, so it is perfectly normal to have different items on each report. Also, your scores will not be the same since each credit bureau uses their own scoring model. Myth 9: Once you are married, you and your spouse share the same credit. This is not true at all. Even if you are married, you will still have your own unique credit reports. It is possible to see some shared items if you have joint accounts, but your credit reports are yours. Myth 10: By closing old accounts, I will improve my credit scores. This is one of the biggest surprises that I see happen to people all the time. You go to your mortgage lender and they instruct you to close some accounts in order to qualify for a loan. You do as you are told, but only to see your scores plummet almost immediately; sometimes by more than 100 points. What happened? The reason for the drop was because you just closed some of your oldest and most valuable accounts as far as your credit scores were concerned. Remember, the longer you have had an account in good standing, the more positive points it will provide. It is not advised to close a long-standing account unless you have good reason. You are now armed with some very powerful information that will surely be able to use to your advantage.
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